Legal Advice on Personal Liability for Contracts under Corporations Act 2001

This article provides legal advice on personal liability for contracts under Corporations Act 2001. It discusses the legal capacity of a company, pre-registration contracts, and partnership contracts. It also includes relevant sections and cases.

BUSINESS LAW
STUDENT ID:
[Pick the date]

Question 1
Issue
The key issue in this case is to tender legal advice to Steve with regards to personal liability
for an ungratified pre-registration contract and another contract enacted after registration with
reference to the relevant sections of the Corporations Act 2001.
Rule
It is noteworthy that company is different from the other business structures such as sole
proprietorship and partnership in relation to the underlying legal capacity. While the other
business structures do not have a legal identity and hence dependent on the owners for
providing identity, this is not the case for company. In accordance with s. 124(1)
Corporations Act 2001, a company has a separate legal identity which is different from the
shareholders or owners. The significant implication of this is that company has the legal
capacity to enter into contracts with outside parties. As a result, the potential benefits and
obligations arising from such contractual relationship are directly borne by the company
which is a considered a legal person (Baxt, Fletcher & Fridman, 2016).
In common law, the legal entity of the company was highlighted in the landmark Salomon v
A Salomon and Co Ltd [1897] AC 22 case. As per the case facts, Salomon had a shoe
business and the assets of the same were transferred to another company where he had
practically 100% ownership since a minor stake was given to wife. The company would up
thus leaving outstanding debenture holders and unpaid creditors. These people approached
Salomon for the outstanding debts of the company which he refused to pay citing that
company is a separate legal entity. The creditors cited that company has been formed with the
deliberate intent to escape liability. However, the court upheld that company is separate from
the promoter/owner and the liabilities of the contractual agreements of company need to be
discharged by the company and no liability arises on Salomon to discharge the outstanding
debts (Cassidy, 2013).
There is a class of contracts that enacted on behalf of the company that merit discussion and
are called as pre-registration contracts. These refer to those contracts that are entered into by
the promoter(s) on behalf of the company before the company is registered. For such
contracts to be enforceable on the company post –registration, it is imperative that these
either in original or modified form must be ratified by the company’s board within the agreed

time or reasonable time (when no agreed time exists) (Baxt, Fletcher & Fridman, 2016). If the
company does not get registered or fails to ratify the contract post-registration within a
reasonable or stipulated period, then in accordance with s. 131(2), liability would be levied
on the promoter who enacted the pre-registration contract. This liability would be the same
which would be levied on the company in case there is breach of contract (Harris, 2014).
However, in accordance with s. 131(3), the courts have the power to direct the company to
pay a part of the damages even though the pre-registration contract or any substitute is not
ratified by the company post registration. A relevant case in this regards is Commonwealth
Bank of Australia v Australian Solar information Pty. Ltd. (1987) 5 ACLC 124 where it was
highlighted that in case of non-ratified pre-registration contracts, the primary liability for the
contracts lies on the promoters only and company would only have secondary liability (Ciro
& Symes, 2013).
Application
In the given case, Sam is one of the promoters of WA Gold Exploration Ltd. He holds 60%
stake in the company and enters a pre-registration contract with regards to supply of drill
machines with Thor Mining Machinery Ltd. The contract is aimed for the benefit of the
company as considering the line of business the drill machines would be required. Later the
company was registered and a board of directors consisting of five directors was put in place.
Owing to lack of experience with regards to mining, Sam could not secure a position as the
director of the company. The newly appointed board decided not to ratify the contract with
Thor Mining and instead decided to buy drill machines from United Mining Machinery Ltd.
Since the company did not ratify the contract, hence there would be a breach of contract and
Sam would be personally held responsible for the same as highlighted in Section 131 of
Corporations Act 2001. Hence, primary responsibility for claims by Thor Mining would be
directed towards Sam while the secondary would be towards WA Gold Exploration Ltd.
Also, it is known that a contract has been signed by the board with regards to purchase of ore
trucks to the tune of $ 500,000 from Volvo Trucks Australia. However, it was later realised
that the gold deposits were considered lower than initially assumed owing to which the
company became bankrupt. It is noteworthy that the company has a separate legal identity
and hence it is legally bound for the contractual relationships. Thus, in accordance with
Salomon case verdict and s. 124, there would no obligation on Sam with regards to any

liability arising on account of the truck contract. Hence, Volvo Trucks cannot hold Sam
liable for the breach of contract by WA Gold Exploration Ltd.
Conclusion
From the above discussion, it may be concluded that Sam has personal liability towards Thor
Mining for the breach of pre-registration contract but he has no personal liability for breach
of contract with Volvo Trucks since it is a post –registration contract.
Question 2
Issue
The main issue is to tender legal advice with regards to enforceability of the contracts entered
by Simon on behalf of the partnership firm.
Rule
Partnership is defined as a relationship which tends to arise between partners who are
carrying a particular business with profit intent. In accordance with s.5 of the Partnership Act,
the following holds true with regards to relationship with outsiders (Gibson & Fraser, 2014).
“Every partner is an agent of the firm and his other partners for the purpose of the business
of the partnership; and the acts of every partner who does any act for carrying on in the
usual way business of the kind carried on by the firm of which he is a member, binds the firm
and his partners, unless the partner so acting has in fact no authority to act for the firm in the
particular matter, and the person with whom he is dealing either knows that he has no
authority, or does not know or believe him to be a partner.”
The logical conclusion from the above section is that the partners would be bound by any
contract or transaction that has been enacted by any partner (with or without requisite
authority) provided the contract enacted lies within the normal scope of the business of the
partnership (Carter, 2012). This has been highlighted in the Mercantile Credit Co Ltd v
Garrod [1962] 3 All ER 1103. In this case, one of the partners (Mr. Parkin) entered into a
transaction regarding a Mercedes car despite the other partners objecting to it. However, the
contract was held as enforceable by the court since the contract dealt with normal business of

the partnership firm. However, it is essential that the outsider must not be aware of the lack of
authority of the partner engaged in contract enactment (Vermeesch & Lindgren, 2011).
With regards to the above understanding, it is noteworthy that principal agent relationship
tends to exist between the partners. This is because all the agents can act as both agents and
principal. This is because when one of the partners is enacting a contract with outside party,
he/she is bounding the firm and hence all the partners to the relationship. As a result, the
partner representing the firm is acting as an agent for the other partners who are not executing
the contract (Davenport & Parker, 2014). The enforceability of the contract on the other
partners tends to directly flow from the liability of the principal for the actions undertaken by
the agent. However, in line with the agency law, the innocent partners can sue the partner
(agent) who acts without requisite approval or authority and can recover damages suffered on
account of a given contractual obligation (Edlin, 2015).
Application
In the given case, a partnership firm (i.e. Computer Solutions) exists with four partners
namely Mary, Simon, George and Sara. As per the partnership agreement, each of the
partners had the authority to enter any contract upto $ 10,000 without consultation from other
partners. However, for contracts exceeding $ 10,000, it was imperative that a unanimous
affirmation of all partners was required.
Simon enters into a contract on behalf of the partnership firm with Sunstar Computer
Hardware for the purchase of a 50GB hard drive to the tune of $ 15,000 without consulting
with other partners. It is apparent that Simon is not authorised to enact this transaction
without affirmation from all other partners since the amount is more than $ 10,000.
However, this lack of authority is not known to the outside party (i.e. Sunstar) and hence the
contract would be binding on the firm and all the partners. The other partners can sue Simon
to recover any losses suffered by the firm owing to the contract.
Simon also enters another contract on behalf of the partnership firm with You Beaut Ute Ltd
as he wanted to venture into freight business, an idea which the other partners opposed. Even
though the contract is unrelated to existing but since the amount is lesser than $ 10,000, hence
authority is deemed to exist and hence the contract would be enforceable for the firm and all
the partners. The other partners can sue Simon to recover any losses suffered by the firm
owing to the contract.

Conclusion
Both the contracts enacted by Simon would be enforceable on the partnership firm and other
partners. However, the other partners can recover damages from Simon to the extent the same
is suffered by the firm because of these two contracts.

References
Baxt, R., Fletcher, K.L. & Fridman, S. (2016). Corporations and Associations Cases and
Materials (10th ed.). Butterworths: LexisNexis Australia.
Carter, J. (2012). Contract Act in Australia (3rd ed.). Sydney: LexisNexis Publications
Cassidy, J. (2013). Corporations Law Text and Essential Cases (4th ed.). Sydney: Federation
Press.
Ciro, T. & Symes, C. (2013). Corporations Law in Principle (9th ed.). Sydney: LBC Thomson
Reuters
Davenport, S. & Parker, D. (2014). Business and Law in Australia (2nd ed.).
Sydney:LexisNexis Publications.
Edlin, D. (2015). Common law theory (4th ed.). Cambridge: University Press Cambridge.
Gibson, A. & Fraser, D. (2014) Business Law (8th ed.). Sydney: Pearson Publications.
Harris, J. (2014). Corporations Law (2nd ed.). Sydney: LexisNexis Study Guide.
Vermeesch, R. B. & Lindgren, K. E. (2015) Business Law of Australia (12th ed.). Sydney:
Butterworths.