BUSI 2301 : Business Law

The issue is whether Thor Mining Machinery Ltd and Volvo Trucks (Australia) Ltd can personally hold Simon liable for the contractual terms?

Law

The Corporations Act 2001 (Cth) provides key regulations which companies have to comply with while managing their operations in Australia. The law provides that after its registration, the company becomes a separate entity. Section 119 provides that this entity becomes the separate entity on the day when it is registered. Based on such entity, the enterprise is able to create contractual relationships with third parties under its own name. As given in Salomon v Salomon & Co Ltd (1897) AC 22 case, the concept of the limited liability of members and the separate personality of members was established by the court (CSU LAW504 Modules, 2018, Topic 14). The liability raised in such contracts cannot bind the shareholders of the company personally liable. Similar views were given by the court in the case of Lee v Lee’s Air Farming Ltd (1961) AC 12. Since the organisation is a separate legal entity, the debt owed by it to its creditors cannot bind its members liable to its terms (CSU LAW504 Modules, 2018, Topic 14). However, the promoters of a company can enter into a contract on behalf of the enterprise, and these terms are binding on the parties to the contract. These contracts are formed before the company is registered, thus, they are called pre-incorporation contracts. These contracts are governed by both common law and the Corporations Act. The common law provides that these contracts bind the company into its terms. However, if the enterprise is not registered, then the person who formed the contract on behalf of the company can be held liable for such contractual liabilities.

Section 131 of the Corporations Act provides provisions regarding the liability of pre-incorporation contracts. The section provides that the contract which is formed by a party on behalf of a company which is not yet registered, then such company is bound but the terms of such contract. The company also has the right to receive the benefits of the contract which is formed with a third party. Furthermore, the corporation also has the right to rectify the contractual terms as per the time which is decided by the parties while forming the contract. However, subsection 2 of this act provides the liability of the person who forms the contract on behalf of the enterprise (CSU LAW504 Modules, 2018, Topic 14). The law provides that an individual who forms a contract on behalf of the company which is not yet registered can be held personally liable by the third party if the contract did not get registered. The person would also be held liable in case the company is registered but decided not to rectify the contractual terms within the specified time limit set by the parties. Furthermore, section 3 of the act provides that a company which receives certain benefit from the contract can also hold the party liable who formed the per incorporation contract on behalf of the enterprise. Section 132 (1) of the act provides that the promoters of a company can be held liable for the third party regarding the payments of the debts if another party signed the discharge agreement (CSU LAW504 Modules, 2018, Topic 14).

Application

In this case, Steve created a contract on behalf of WA Gold Exploration Company while acting as the promoter of the company. The contract was formed with Thor Mining Machinery Ltd regarding the purchase of a drill. The contract was a pre-incorporation contract since WA Gold Exploration Company did not register yet based on which the provisions given under section 131 applies to this case. After incorporation of the company, the board members of WA Gold Exploration Company filed to rectify the contractual terms to rescind the contract. The benefit of the contract was rejected by WA Gold Exploration Company based on which Thor Mining Machinery Ltd can hold Steve liable for payment of the debt. Therefore, section 131 applies in which case based on which Thor Mining Machinery Ltd can held Steve personally liable for breaching the contractual terms of the contract. In the case of Volvo Trucks (Australia) Ltd, the contract was formed after the registration of WA Gold Exploration Company. As per the provisions given in the case of Salomon v Salomon & Co Ltd, the company is liable for its own debts, and the shareholders cannot be held liable for such debt personally. Thus, WA Gold Exploration Company is liable for its own liabilities, and Volvo Trucks (Australia) Ltd cannot hold Steve liable for the contract.

Conclusion:

To conclude, Thor Mining Machinery Ltd can held Steve liable for breach of the pre-incorporation contract since WA Gold Exploration Company failed to comply with its terms. In case of Volvo Trucks (Australia) Ltd, Steve cannot be held liable since the contract is formed after the company is incorporated based on which the shareholders cannot be held personally liable for its debts.

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Issue

The issue raised in this case is whether the partnership can be held liable for the contracts formed by Simon by breaching the internal contract which is formed between partners? Whether any legal action can be taken by partners against Simon for his actions?

Law

The partnership established in Australia is governed by the provisions of the Partnership Act 1892 NSW. The definition of the partnership is given under section 1 (1) of the act. It is defined as a relationship formed between two or more parties who jointly decide to run a business in order to manage the operations in common with an objective to generate profit. The partnership did not have a separate legal entity, and the partners are jointly and severally liable for the debts in case the firm failed to repay them. The partners have a fiduciary duty towards each other based on which they act as the agent for each other. Section 5 (1) of the act provides that the partners act as the agent for other partners based on which they can enter into a contractual relationship on behalf of the entire partnership (CSU LAW504 Modules, 2018, Topic 13). The actions taken by partners during the ordinary course of business in which they enter into a contract with third parties binds the other partners liable based on the terms of the contract. The provision of this section did not apply in case the actions of the partner are outside the scope of the business of the partnership. Therefore, section 5 (1) only applies when the actions of the partners are within the ordinary course of business of the partnership.

Section 5 (2) of the act provides that the actions of the partners must come under the definition of business conducted in the “usual way”. The actions which are outside the scope of the business as usual did not bind other partners in terms of the contract which is formed by a partner while acting outside the scope of the business. Section 7 provides that the actions of a partner which are outside the scope of the business can bind other partners liable in case the actions are taken by the partner based on an expressed authority which was given based on the agreement between partners (CSU LAW504 Modules, 2018, Topic 13). Thus, the contract which is formed by the partner for any personal liability cannot hold other partners liable. According to section 8 of the act, if an internal contract is formed between partners that restrict the liability of partners to enter into contractual relationships, then other partners cannot be held liable under the terms of such contract only if the third party is aware of such contract. In case the third party is not aware of the internal contract formed between the partners, then all the partners are liable as per the provisions given under such contract.

A good example was given in Mercantile Credit Ltd v Garrod (1962) 3 All ER 1103 case; in this case, parties entered into a contractual relationship for a garbage business in which they form an internal contract in which they decided that they will not purchase or sell cars (CSU LAW504 Modules, 2018, Topic 13). However, one partner sold a car to a third party based on the partnership business. The court provided that since the third party was not aware of the contractual agreement and selling of a car comes under the ordinary course of business both partners are liable under the contract. Section 9 (1) provides that the partners’ joint liability in the business can be discharged when the liability of a partner is discharged. Section 10 of the act provides that all partners in a firm are liable towards the torts committed by a single partner while acting within the ordinary course of business. In Polkinghorne v Holland & Whitington (1934) 51 CLR 143 case, a partner used the money of the law firm to establish a sham company (CSU LAW504 Modules, 2018, Topic 13). The fraud was conducted by the partner during the ordinary course of business based on which the court provided that all partners are liable for the tort committed by a single partner.

Application

In this case, an internal contract formed between Simon, George, Sara, and Mary based on which they decided that approval of all members will be necessary while investing more than $10,000 of the partnership money. Simon purchased a 50TB hard drive on behalf of the partnership which was worth $15,000 from Sunstar Computer Hardware. Although an internal contract was formed between the partners to get the approval of other partners while investing more than $10,000, however, Simon did not ask for the permission of other partners. However, Sunstar Computer Hardware was not aware of the internal contract of the partnership; thus, all partners are liable as per the terms of the contract (Mercantile Credit Ltd v Garrod). In case of You Beaut Ute Ltd, Simon purchased a second-hand Ute on behalf of the partnership for $9000. Simon acted outside the scope of the partnership based on which other partners are liable for the contractual relationship formed by him as given under section 5 of the act. Since Simon acted by breaching the internal contract of the partnership, other partners can claim compensation from him.

Conclusion:

To conclude, Sunstar Computer Hardware can hold other partners liable for the contract, however, You Beaut Ute Ltd can only held Simon liable for the contract since he acted outside the scope of the business. Simon can be held personally liable for breaching the internal contract formed between the partners.

References:

Corporations Act 2001 (Cth)

CSU LAW504 Modules, 2018

Lee v Lee’s Air Farming Ltd (1961) AC 12

Mercantile Credit Ltd v Garrod (1962) 3 All ER 1103

Partnership Act 1892 NSW

Polkinghorne v Holland & Whitington (1934) 51 CLR 143

Salomon v Salomon & Co Ltd (1897) AC 22