Legal Advice on Business Association Scenarios

LAW OF BUSINESS ASSOCIATIONS
Student Name
[Pick the date]

Question 1
A legal advice needs to be extended to Raj and Alana for the given scenarios.
A) Organic Wines Pty Ltd (OW) would be bound with the contract enacted with Seedy
Vineyards or not under the following circumstance.
Case 1: Priya has enacted a contract with Seedy Vineyards while exceeding her authority for
contract formation on behalf of OW
Case 2: The breach of objects clause highlighted in the constitution of OW
Company has separate legal entity in accordance with s.124 (1). However, it is imperative that
company must appoint agents who will enact contracts with outsider parties on behalf of the
company. Further, it is noticeable that some of the agents may enact contract with outsider party
irrespective of the presence of requisite authority1. Therefore, in such cases s. 129 Corporations
Act 2001 would be taken into consideration. According to s. 129, third party can make
assumptions regarding the aspect that agent is duly assigned by company and hence is enacting
the contract on behalf of the company with required authority2. This aspect is termed as indoor
management rule and the verdict stated in Royal British Bank v Turquand3 case is the testimony
of this aspect. Further, s. 128 would be taken into account for the exception of the assumption of
s. 129 only when it is evident that third party who has entered into the contract with the agent
had reasonable suspicion or knowledge regarding the authority of the agent before contract
enactment4. Section 125 (2) indicates that breaching of the object clause alone would not restrict
the action of the company and hold it untenable. It means s. 125(2) expands the range of the
action of company with the third parties irrespective of breach of objects clause as highlighted in
the constitution of the company5.
In the given scenario, it can be seen that Priya who is daughter of Raj and Alana is working as
the managing director of OW. Here, she has made a contract with Seed Vineyards for a
1 Jason, Harris, Corporations Law, (LexisNexis Study Guide, 2nd ed., 2014)
2 Austlii, Corporations Act 2001- Sec 129 http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s129.html
3 Royal British Bank v Turquand (1856) 6 E&B 327 case
4 Austlii, Corporations Act 2001- Sec 128 http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s128.html
5 Austlii, Corporations Act 2001- Sec 125 http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s125.html
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consideration amount of $500,000. It can be said that Priya does not have requisite authority to
enact the contract with third parties for the following two reasons.
 She has been appointed as managing director of the OW only for two years and her tenure
has finished in February 2018 and also she has not been duly reassigned to the position of
managing director. However, she continues her work as managing director for OW.
 Secondly, she has authority to enact a contract with third party for a consideration of not
higher than $100,000. However, she has made enacted a contract for a sum of $500,000.
In such cases, it is essential that Priya lacked the authority to enact an enforceable contract with
Seedy Vineyard.
Furthermore, she should have taken necessary approval from the board of directors before
enacting the contract. However, here indoor management rule would be applicable under s. 129,
as Seedy Vineyard does not have any suspicion regarding the lack of authority of Priya and
hence, OW would be bound with the contract made by Priya with Seedy Vineyard. Further, it is
essential to note that Priya has breached the objects clause highlighted in the constitution of
company regarding the organic grapes for the wine as she enacted a contract for buying non-
organic grapes from Seedy Vineyards. In this case also, the company is held liable to complete
the contractual liability with Seedy Vineyards under s. 125(2) as the enacted contract is not void
due to the breach of objects clause6.
Therefore, it can be concluded that OW has to complete all the contractual liabilities which are
raised due to the contract enactment carried out by Priya with Seedy Vineyard irrespective of the
aspect that Priya lacked required authority. Further, there would be no effect incurred on the
contractual liability for the case when there is breached of objects clause by Priya by ordering
non-organic grapes.
B) To ascertain whether the clause in constitution for appointing himself as company solicitor is
enforceable and also, the available remedies for Ted if the breach of this clause is incurred.
According to s. 140 Corporation Act 2001, constitution of a company is an essential document
which includes numerous aspect in relation with the work, contracts formation, authorities,
6 Ibid. 9.
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