Business and Corporations Law Assignment - Agency and Contracts

This document provides a comprehensive solution to a business and corporations law assignment. The assignment addresses two main questions. The first question involves providing legal advice to Terence regarding the existence and enforceability of contracts with Gabby (regarding a brooch), Mary (regarding gold), and Gordon (regarding diamonds), analyzing agency law principles, including express and implied authority, the doctrine of indoor management (Royal British Bank v Turquand), and the Corporations Act 2001 (s.128 and s.129). The second question focuses on advising Roger regarding a claim from Industrial Machines Ltd and the denial of an explosive manufacturing license. This part explores corporate law concepts, including the separate legal entity doctrine (Salomon v Salomon & Co Ltd), piercing the corporate veil (Gilford Motor Company v Horne, Jones v Lipman), and implied agency, along with relevant sections of the Corporations Act 2001 (s. 119 and s.124(1)(a)). The solution applies these legal principles to the given facts, concluding on the enforceability of the contracts and the validity of the Department's decision regarding the license.

BUSINESS & CORPORATIONS LAW
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Question 1
Issue
The key objective is to tender legal advice to Terence in relation to the following issues.
 Whether a legal contract exists between Gabby and Terence with regards to $ 1,000
brooch?
 Is there an enforceable contract between Terence and Mary in relation to sale of gold?
 Whether Gordon has an enforceable contract with Terence in relation to sale of
diamonds?
Rule
The branch of law which deals with agency relationship is known as agency law. In agency
law, the principal delegates some authority to the agent and the latter is supposed to act in the
interest of the principal. One of key functions of the agency relationship is to allow the agent
to enter into contracts on behalf of principal. A crucial element in this regards is presence of
authority with the agent (Davenport & Parker, 2014). This authority may be express or
implied. Express authority refers to the authority that the principal has explicitly granted to
the agent. Apparent authority refers to the sphere to authority that is perceived by the third
parties on account of the conduct of the agent. It is expected out of the agent that they must
execute contracts considering the authority provided by the principal (Gibson & Fraser,
2014).
However, at times contracts are entered into by innocent third parties when the agents do not
have the requisite authority. In such cases, it is imperative to safeguard the rights of the
external parties which can be carried out on the basis of indoor management doctrine (Carter,
2012). The relevant case which forms of basis of this protection extended to third party under
common is Royal British Bank v Turquand (1856) 6 E&B 327 case. The key aspect which
has been highlighted through this case is that if the outside party enters into contractual
relation with a company or principal, then the contract cannot be termed void on the basis
that the agent executing the contract lacked the requisite authority or was acting in a manner
not consistent with the directions of the principal (Taylor & Taylor, 2015). However, an
exception to this rule is when the third party is aware or has reasonable suspicion about the
fraudulent conduct of agent or lack of authority but still goes ahead and executes the contract.

The above common law protection has been extended in the form of Corporations Act 2001
where s.128 and s.129, are relevant. In accordance with s. 129, a third party while entering in
contractual relation with a company can assume that the concerned agent representing the
principal has the necessary authority for executing the contract. In accordance with s. 128(3),
the innocent third party can also hold the assumption even when the agent is intentionally
acting in a fraudulent manner. Further, s.128(4) highlights that the assumptions would not be
valid if the third party is aware or has reasonable doubts about the agent lacking authority for
enactment of the contract (Paterson, Robertson & Duke, 2015).
As a general rule, the principal needs to inform the outside parties with regards to
withdrawing the authority to a particular agent. In the absence of such communication, it is
possible that the agent may contact the third party which may enter into contractual relation
based on the explicit or apparent authority possessed by the agent representing the principal
(Gibson & Fraser, 2014). In such cases, the principal would be bound by the contract owing
to the doctrine of indoor management as is apparent from the verdict in the Freeman&
Lockyer v Buckhurst Park Properties [1964] 2 QB 480 case (Carter, 2012).
Application
In the given case, Terence is the principal and Peter & Sara are the agents appointed by
Terence. Based on the given facts, Sara has enacted a contract with Gabby for a $1,000
brooch. Since Sara visited Gabby as an agent of Terence and additionally also informed
Terence about the order, hence it is apparent that there is a contract between Gabby and
Terence. This is because the contract enacted by Peter has been on behalf of the principal
Terence only. Therefore, an enforceable contract does exist between the two.
In relation to transaction between Peter and Mary, it is apparent that on account of the
previous dealings with Peter, Mary was aware that Peter had the requisite authority to enact
contract with regards to purchase of gold. Also, the instruction given by Terence to Peter
regarding not buying gold is not known to Mary. As a result, in line with the doctrine of
indoor management, the interest of Mary would be protected irrespective of the fact that Peter
disobeyed the instructions given by Terence (principal). Hence, an enforceable contract exists
between Mary and Terence for sale of gold.

In relation to transaction between Gordon and Peter, it is apparent that they enacted the
contract on Tuesday even though Peter was fired on Monday. Hence, at the time of enacting
the contract, Peter did not have the requisite authority. However, Gordon did not know about
the same as neither Peter nor Terence had informed him about the same. Thus, in accordance
with the indoor management doctrine, an enforceable contract would exist between Terence
and Gordon for the sale of diamonds worth $ 5,000. Terence in this case can sue Peter for
violation of the fiduciary duties of the agent and claim damages for the loss incurred by him
owing to the enactment of contract with Mary and Gordon.
Conclusion
Based on the above discussion, it would be apt to conclude that there is an enforceable
contract between Sara and Terence regarding the brooch. Also, an enforceable contract does
exist between Mary and Terence for sale of gold. Besides, another enforceable contract exists
between Terence and Gordon regarding sale of diamond. Also, on account of any losses
arising from the contracts with Mary and Gordon, Terence can sue Peter for violation of the
fiduciary duties in an agency relationship.
Question 2
Issue
The core issue in the given situation is to offer advice to Roger with regards to the claim
made by Industrial machines Ltd and also the decision made by the Department of Industry
not to grant the license.
Law
As per s. 119, Corporations Act 2001, a company is incorporated when registration is
complete. This implies that the following attributes are linked to the company (Taylor &
Taylor, 2015).
 It has a legal existence which is separate from the members or shareholders. This is in
sharp contrast with the other business structures which lack a separate legal identity
independent of the owners.

 The company has a perpetual succession until it is deregistered and thus there could
be potential changes in the shareholding without impacting the existence of the
company.
 The company has the legal capacity to hold property. As a result, for the properties
that are held by the company, the members of shareholders have no direct interest in
the same.
 The company has the capacity to sue and be used by members and third parties.
One of the key significant attributes from the above list is the separate legal entity which the
company has in accordance to s. 124(1)(a). This is significant since it implies that the
shareholders are not synonymous with the company and thus any liability on account of any
contractual agreement would arise for the company provided it has been enacted in the
personal capacity of the directors or agents (Paterson, Robertson & Duke, 2015).
A leading case which demands merit in this context is Salomon v Salomon & Co Ltd [1897]
AC 22. As per this case, Salomon incorporated a company named Salomon & Co Ltd and
transferred all his assets. As a result, Salomon simultaneously became both the shareholder as
well as the creditor of this newly formed company. Bring the creditor, the company issued
debenture to Salomon who thus was the secured creditor who would be given preference in
case of liquidation of the company. Salomon sold the debentures issued and shortly
afterwards the company became bankrupt. The creditors and debenture holders of the
company could not recover their money and thus held Salomon liable in personal capacity.
The court decided that the major shareholder (Salomon) and the company were two separate
entities and hence personal assets of Salomon cannot be liquidated to settle outstanding
creditors and debenture holders of the company. Additionally, it was highlighted that
Salomon did not have any intention to fraud behind setting up of the company. This led to the
establishment of the ‘principle of corporate veil’ (Carter, 2012).
It is noteworthy that considering the possibilities of abuse of the immunity provided to
members by the company legal structure, it is open to abuse and thus there are circumstances
in which the piercing of the corporate veil is permitted (Andrews, 2011). One of the relevant
circumstances is when there is a need to enforce the relevant provisions of law and in such
cases the unveiling of the corporate veil is carried out through legislation. However, another
common instance when such an action is justified when there might be an implied agency
relation and thus the court can decide to lift the corporate veil (Davenport & Parker, 2014).

A relevant case in this regards is Gilford Motor Company v Horne [1933] Ch 935. In this
case, the defendant had entered into a non-compete clause with the company. However, in
order to evade the non-compete agreement, a company was formed with his relatives as the
directors and shareholders. In this company, he was an employee. However, in this case, the
defendant was held liable as the courts lifted the corporate veil (Carter, 2012). A similar case
of implied agency is Jones v Lipman [1962] 1 All ER 442, when in order to escape the
specific performance order, the defendant sold the house to the company which was held by
the defendant. In this case also, the courts had to resort to lifting the corporate veil (Taylor &
Taylor, 2015).
Application
In the given situation, it is apparent that Roger Smith is the majority shareholder while his
brother Timothy Smith is Managing Director of the company named United Chemicals Pty
Ltd. The company has purchased a phosphate processing machine from the seller i.e.
Industrial Machines Ltd and agreed to pay a sum of $600,000 in three instalments. The
company owing to a slowdown in business is not able to make one of the instalments for the
machines. The creditor i.e. Industrial Machines Ltd starts demanding money from Roger
Smith knowing that he can afford the payment. However, considering the case facts, it is
imperative there is no liability for Roger since the company and Roger are two separate legal
entities. The machine sold by Industrial Machines Ltd has been sought by the company and
not by Roger. Thus, for any outstanding debt in this regards, the creditors must sue the
company and not the shareholder since no liability arises on the shareholder to make the
payment.
Also, Roger wanted to expand into making explosives but owing to his previous criminal
offence, he was denied extension of the explosive manufacturing licence in accordance with
the prevalent legislation. Roger therefore floats another company (Explosive Industries Pty
Ltd) in which he is 99% shareholder and also the managing director. A fresh application is
made for the explosive manufacturing license and it is denied on the same grounds as earlier.
This decision is accurate since the sole purpose of forming the company is to manage the
explosive manufacturing license which Roger cannot obtain as an individual. Hence, there is
implied agency relationship and thus the company is not separate from Roger. As a result, the
department is correct in not issuing an explosive manufacturing licence.
Conclusion

It may be concluded that the Industrial Machines Ltd cannot hold Roger liable for the
outstanding payment and instead the company (United Chemicals Pty Ltd) should be sued for
recovering pending payments. Further, the department is correct in not issuing licence to the
company as there is an implied agency relationship which can be made clear by lifting the
corporate veil.

References
Andrews, N. (2015) Contract Law (3rd ed.) Cambridge: Cambridge University Press.
Carter, J. (2012) Contract Act in Australia. (3rd ed.) Sydney: LexisNexis Publications.
Davenport, S. & Parker, D. (2014) Business and Law in Australia (2nd ed.). Sydney:
LexisNexis Publications.
Gibson, A. & Fraser, D. (2014) Business Law (8th ed.) Sydney: Pearson Publications.
Paterson, J. Robertson, A. & Duke, A. (2015) Principles of Contract Law (5th ed.) Sydney:
Thomson Reuters.
Taylor, R. & Taylor, D. (2015) Contract Law (5th ed.) London: Oxford University Press.
Case Law
Freeman& Lockyer v Buckhurst Park Properties [1964] 2 QB 480
Gilford Motor Company v Horne [1933] Ch 935
Jones v Lipman [1962] 1 All ER 442
Royal British Bank v Turquand (1856) 6 E&B 327
Salomon v Salomon & Co Ltd [1897] AC 22