Law of Business Association Issues 2022

LAW OF BUSINESS ASSOCIATION

Issue:
The concern in the given scenario is to analyse the validity of the contract as between seller
of the motorbike John (hereinafter referred to as J) and the company Motorbikes Pty Ltd
(hereinafter referred as MP). Thus, whether there is binding contract between the parties or
not would be analysed in light of the Corporations Act (Cth).
Rules:
The Corporations Act (Cth) governs the matters related to the companies in Australia. The
various sections prescribe the various procedures and manners of different aspects of
company administration. One such aspect of management of the affairs of the company is the
entering into the contracts by the board of directors on behalf of the corporate. It is essential
to note that most significant feature of corporate business structure is that there is existence of
separate legal identity different from the members or the shareholders. The principle of the
separate legal identity has been stated in the section 124 (1) of the said legislation. Thus, on
fulfilment of the registration formalities, the agents or the managerial body can enter the
contracts in the name of the company. It has been stated in the act that it is the legal duty of
the directors to enter into contracts on behalf of the corporates. The said legal duty has been
elaborated in the section 126. The section 127 (1) of the legislation is also worth noting in
this regard. The manner of contract signing has been further prescribed. There are two modes
of contract creation for the companies without the use of the common seal (Austlii, 2019).
The first mode specifies the contract to be signed by either two members of the board of
directors, or one director and the company secretary. The second mode states that if
authorised by the constitution of company the said power can be delegated to an authorised
employee of the company. The use of the common seal of the corporate is also significant in
the contract of the companies. Hence, when the contracts are entered between the parties,
where one of the parties is a corporate, the third parties have reasons to believe that there are
no irregularities. The third party assumptions principles are laid down in the Section 129. The
section states that if the third parties do not have contrary reasons to believe regarding the
irregularities in contract execution, they would believe that the conditions laid down in the
Corporations Act have been complied with respect to the contract execution.
The well renowned case and judgement pronounced therein of Knight Frank Australia Pty
Ltd and Paley Properties Pty Ltd must be noted here. It was held in the case that the third
parties have option to opt out of the contracts that have not been legally formed in first place

because of non-fulfilment of conditions stated in the Corporations Act. Hence, when the
contracts are entered on behalf of the corporations, the adherence to the above mentioned
rules is mandatory for the board of the directors.
Application:
The following segment lays down the application of the legal rules as stated in the previous
sections and the principles in the judgement of the case law in the form of following points.
The significant thing to be noted is that the contract of purchasing the J’s motorbike has been
signed Tim as well Michelle. It must be further noted that there has been agreement reached
for purchase price of the motorbike to be of $ 5000. After the signing of the contract,
Michelle has a thought of paying too much for the said vehicle. However, the contract of the
company MP has J has been properly executed as the same is signed by one of the company
directors together with the company secretary of MP. Thus, the conditions of the section 126
and 127 are duly fulfilled.
Conclusion:
The discussions conducted in the previous parts aid to reach conclusion that the execution of
the contract with MP is proper and therefore MP is bound by the contract. This is because the
manner of signature is in accordance with the rules stated in legislation and hence, contract
would be violated if the directors decide to move out of it.

References
Austlii (2019) Corporations Act 2001 - Sect 127 [online] Available from:
http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s127.html [Accessed on: 21 September
2019].
Corporations Act, 2001 (Cth)
Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd [2014] SASCFC 103