Contractual Validity and Director's Duties in the Wake of Firing

The contract between Executive Car Fleets Ltd and Fraser was cancelled by the managing director before Fraser could sign it. The MD's firing of Fraser meant he no longer had authority to sign the contract on behalf of the company. Although there should have been proper communication made after the MD fired Fraser, the contract became void. As per the provisions of the laws, Executive Car Fleets Ltd can succeed in a legal action to enforce the contract.

Question 1
Issue
There are a number of issues that arise here.
a) `The contract was to be signed at 4 pm between Richardson and Fraser based on the offer
made by Executive Car Fleets Ltd.
b) The moment Richardson met with Mary Jones, he came to know through her that it was
highly likely that Fraser was going to be fired by their Managing Director.
c) At 4 pm the deal was done between the two despite what had happened earlier. However.
d) The next day the very same deal was cancelled by the Managing Director of Speedy Auto
Hires saying that he had fired Mark Fraser at 2 pm, that is, two hours before the deal took
place.
Law
a) As per the Australian Contract Laws, the essential ingredients of the contract were present
there because a contract is more than an agreement between two parties1. It had offer and
acceptance as well as the intention to make a legally binding agreement. Therefore, on that
count, the offer is completely valid between the two parties as long as the proper
understanding and consent was involved.
b) Richardson was in doubt because he was told by Mary Jones that the MD wants to see
Richardson probably to fire him because of his poor performance. The contract has not yet
signed between the two companies, so they need to remove the doubts if any. As we know
that the contracts become valid when acceptance is given along with the other party giving
statements to the offer it gets. So, it must be unequivocal as well as communicated to the
offer, otherwise, the law would never deem a party to have accepted the offer just because
it has not straight away rejected the offer2.
c) When the deal was signed between Richardson and Fraser, here we have two possibilities –
either Fraser did not know that he was fired or he was deliberately doing that so that his
company will incur loss. In any case, if he had been given authority to make the deal.
d) When the MD of Speedy Auto Hires called Richardson to inform him about the cancellation
of the deal then there is a clear case of miscommunication between the parties. Therefore,
as per the sections 18 and 41 of Competition and Consumer Act 20103 (Commonwealth) and
Australian Consumer Law, the invitations or offers for the purpose of sale and purchase
cannot and should not be misleading or deceptive.
1 John Carter, "Good Faith In Contract: Why Australian Law Is Incoherent" SSRN Electronic Journal.
2 Philip Santucci, "Substantive Fairness In Australian Standard Form Consumer Contracts: Lessons From The UK
Experience" (2011) 11 Oxford Uni Cwealth Law J.
3 Richard Whish, Competition Law (Oxford University Press, 2009).

Application
a) As is clear by the contract law4, that the offer for the contract to purchase 30 Mercedes
Benz is valid. Because the required components of the valid offer definitely seem to be
genuine and there is a presence of the intent to the contract. The offer on the part of
Executive Car Fleets Ltd has been communicated with terms and conditions. In the case of
valid offers, there can be different forms of intents involving the course of conduct by
stating explicitly. While communicating the offer in writing, the offer must contain specific
terms like price, manner of acceptance and timing. So, all of these elements were discussed
between Richardson and Fraser making it a valid offer for the contract.
b) When Richardson came to know that something is brewing in Speedy Auto Hires and then
there was an element of doubt on his part, yet he proceeded with the contract that was
going to be signed between the two. At this point, the provision of negligent
misrepresentation5 arises wherein any party to the contract is under a special duty of care
to the other party. As the circumstances were such that it was reasonable to rely on the
statement made by Mary Jones and it was less likely that her statement would be false.
Therefore, Richardson would have taken the special care in this case. He should have
spoken to the ‘buyer company’ as to whether the information was correct or not.
Moreover, when Richardson informed his Chief Financial Officer about these developments,
he strictly ordered him to go ahead with the possible contract. So, as per Australian
Contract Law, here, the course of action has been affected by the undue influence. The
undue influence is carried out by taking unfair or improper advantage created by the
weakness of the other party.
c) When the contract was signed between Richardson and Fraser then it was done on the
basis of the mutual agreement between the two on behalf of their companies. However,
when the contract was signed, Fraser was apparently fired by his MD at 2 pm precisely,
while the deal took place at 4 pm. But the two conditions that emerge at this point as
mentioned earlier were either Fraser knew that he had been fired and deliberately doing
this to bring harm to his company or he did not know about it at all. Since, the
communication of the firing of Fraser from Speedy Auto Hires was not mentioned in the
scenario, so, it is safe to assume for us that Fraser did not know anything about his firing.
Therefore, in such a situation, the contract will be valid.
d) Now when the deal was cancelled by the managing director of Speedy Auto Hires, the
contract had been signed till then but just before that MD had fired Fraser. So, technically,
before signing the contract, Fraser was rendered no authority to sign it on behalf of
4 John Carter, "Good Faith In Contract: Why Australian Law Is Incoherent" SSRN Electronic Journal.
5 Corporations Act 2001 (2016) Legislation.gov.au <https://www.legislation.gov.au/Details/C2013C00003>.

Executive Car Fleets Ltd. However, there should have been a proper communication made
just after firing him by the MD. In any case, the contract became void.
Conclusion
As per the provisions of the above laws, it can be concluded that the contract is valid and
Executive Car Fleets Ltd will succeed in a legal action to enforce the contract, citing statutory
and case law authority.
Question 2
Issue
The issues that come forth in this scenario are as follows:
1. The breach of written constitution of the company (Sparkles Ltd.).
2. Breach of director’s duties and responsibilities as Roger Rogerson sold a rare sapphire for
$5,000 whose real worth was $100,000 and is about to sell a ruby for $8,000 whose real
worth is $40,000.
3. Breach of duties and responsibilities of Board of Directors as they are expected to be fair,
transparent and accountable, but they did not pay heed to Peter’s complaints.
Law
1. As according to the constitution of Sparkles Ltd, Peter will be given a three year contract to
supply stationery to it, but apparently the company had decided to do the business with
Office Pax Ltd – a third company. We know that the company constitutions are a set of rules
and guidelines with which any company operates. As per the Corporation Act 20016, the
courts have primarily assessed actions that could be termed as the breach of constitution of
the company. That is, a variation of actions without the adherence to the constitutional
provision that need consent from the affected party so that the result of the variance is
rendered invalid or no effect. Also, the constitution can be changed by passing a special
resolution with the help of voting on the part of shareholders.
2. Section 198A (1) of The Corporations Act 20017 states that any company’s business is
managed by the directors with the help of certain legal duties and responsibilities. The
Corporations Act, 2001lays down the four basic duties of the director:
6 (2016) <http://Corporation Act 2001>.
7 CORPORATIONS ACT 2001 - SECT 198Apowers Of Directors (Replaceable Rule--See Section 135) (2016)
Austlii.edu.au <http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s198a.html>.

i. Care and diligence: The section 180 states that a fair degree of care and diligence shall
be used, it is also imposed on the director as per the common law.
ii. Good faith: It is always in the best interest of the company if the director acts in good
faith. It also includes the duty of fidelity and trust.
iii. Improper use of position: According to Section 182, the directors are not supposed to
use their position to gain advantage for themselves or someone else for that matter.
iv. Improper use of information: According to Section 183, the directors are not supposed
to use the information that is confidential in order to gain advantage for themselves or
someone else.
v. Insolvency: It is very critical that the director should stay from any trade when there is
insolvency in the company.
3. As per the Corporation Act, 2001, the Board of directors of a company are charged with the
responsibility of providing good corporate governance. These responsibilities are
characterized by important policy and performance. They are supposed to maintain
fairness, transparency, accountability and avoidance of the conflicts of interest.
Application
1. According to the facts of the case and as per the Corporations Act, 20018, there is a clear
breach of company constitution because Peter got to know that the company Sparkles Ltd
has changed its client and started dealing with another company to source its stationery
requirements. As per the law, the company should have informed Peter about the step that
they are going to take in relation to change their business dealings. Under Section 125(2) of
the act, the company’s constitution restricts its activities in which it is engaged. If such was
the case, Sparkle Ltd should have taken the necessary steps to modify and repeal the
provisions of its constitution by passing a special resolution wherein it had to give 21 days-
notice along with an agreement of 75% of majority of votes cast.
2. The Director and CEO, Roger Rogerson has clearly violated the duties and responsibilities of
a director because the kind of transaction that took place with regards to the sale of the
rare stone. As per the law, it is very important that while running a company, the director9
should be aware of his financial duties regarding the commercial health and economic well-
being of the company rather than protecting any individual. In the present scenario,
Rogerson directly benefited his nephew by selling the rare sapphire in a price which was
way below its actual worth, thereby jeopardizing the company’s financial gains. Therefore,
under section 1317G, fines and penalties may be imposed on the director on account of the
breach of his duties and responsibilities. Rogerson is also liable to compensate for the loss
the company suffered. In rare circumstances, he can also be disqualified from holding the
office on account of a serious breach such as acting dishonestly or fraudulently. So, as per
8 CORPORATIONS ACT 2001 (2016) Austlii.edu.au
<http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/>.
9 Are You In Breach Of Your Duties As A Company Director? (2015) Di Rosa Lawyers
<http://dirosalawyers.com.au/breach-duties-director-company/>.

the law, the possible fine that can be imposed in such a situation is up to $200,000 or
imprisonment of up to 5 years or disqualification from the position of director.
3. The primary role of the board of directors10 of any company is to safeguard the interests of
investors and all other stakeholders. In order to perform this responsibility, the board is
needed to become active, informed and competent to efficiently supervise the company. It
is also responsible to appoint chief executive and suspend him as well. So, in the present
scenario, when it was brought to the notice of the board by Peter about the misdeeds of
Rogerson regarding the deal, the board of directors should have taken the cognizance of the
facts of the letter. An internal investigation was the pertinent step that was needed to have
taken by them because it would have been in the best interest of the company. So, this step
would have served the purpose of upholding the interests of its investors, customers,
shareholders and all the other stakeholders.
Conclusion
So, on the basis of the above analysis of the scenario and finding out different provisions
related to the different issues that were emerged in the case, Peter should seek professional
legal help under the Sections 198A (1), 180, 182, 183,125(2) and 1317G of Corporations Act,
2001 (Commonwealth).
10 Pablo de Andres and Eleuterio Vallelado, "Corporate Governance In Banking: The Role Of The Board Of
Directors" (2008) 32 Journal of Banking & Finance.