Business Law Essay: Legal Relationship

Discuss about the Business Law Assignment for Legal Relationship.

An agency is a legal relationship in which one person authorises another person to act on his behalf.  The person who is authorised to act on another’s person behalf is called an agent and the person on whose behalf the act is done is called a principal. There are certain obligations and liabilities which arise from the creation of agency. The agent can enter into a contract with a third party and such contract will bind the principal with the third party.[1]

A distributor agreement, on the other hand is different from the contract of agency. A distributor is an individual businessman who runs business in his own name and he does not act on behalf of others. He purchases goods at a low price form the manufacturer or the supplier and sells the gods at a higher price. This is how it makes profit.[2]

Under the common law, both the distributor agreement and the agreement of agency are governed by the terms and conditions of the contract into which they enter.

Facts of the case

PharmCo International is an international pharmaceutical wholesaler. The head office of the Company is in Sydney, Australia. The Company has invested in purchasing stocks of various blue cheap companies over the last 20 years. The Company has various subsidiaries and has a number of offshore accounts. The complex finances of the Companies are managed by Goldman Asset Management (GAM) which is based in Sydney. Because of this arrangement, the managers of PharmCo could easily focus on their business of improving their drug distribution networks without bothering about their financial position.

A distribution arrangement was entered into between PharmCo and Paratol Ltd in January, 2015. Paratol Ltd. is the manufacturer of Paratol pain relief medicine. Under the terms of the arrangement, Paratol Ltd was required to release a large stock of Paratol painkillers valued at $2,000,000 on credit to PharmCo for distribution. Under the conditions of the arrangement, PharmCo was given a 6 months grace period for paying off the amount. Further PharmCo was required to give a letter of guarantee from its asset managers verifying that the assets of PharmCo was sufficient enough to meet the amount of $2,000,000 in case the Company defaults in its payment.

Thus, under the circumstances of the case, there was a distribution agreement between PharmCo and Paratol Ltd and the parties were to be governed by the terms and conditions of the agreement.

Issue

Issue

1. The issue is whether Paratol Ltd. is entitled to recover the money amounting to $2,000,000 from its distributor, PharmCo?

2. Since GAM manages the finance of PharmCo and has given a letter of guarantee that PharmCo has sufficient assets to cover the amount of $2,000,000, whether PharmCo can recover the amount from GAM?

Relevant Law

Under the common law there is no specific legislation which deals with an agency or a distributor agreement. The parties are governed by the terms of the contract which they enter into.  They are free to contractually enter into such terms and conditions as they feel like.

Application of the law

In the instant case, the distribution agreement between the manufacturer (Paratol Ltd) and the distributor (PharmCo) laid down the following terms:

1. The manufacturer would release a large term stock of Paratol painkillers to the distributor.

2. The price at which the stock of painkillers would be released is $2,000,000.

3. The distributor would then have a six months grace period to pay off the amount.

4. The assets manger of the distributor would have to give a guarantee verifying that the assets of the distributor was sufficient to cover the total amount in the event of default made by the distributor.

In the instant case, the manufacturer performed its part of the contract by releasing the stock of Paratol painkillers amounting to $2,000,000. A letter of guarantee was also given by the asset manager of the distributor stating that the distributor had sufficient assets to cover up the specified amount in event of default made by the distributor.

In December 2015, the distributor became insolvent it was found that the Distributor was running in deficit for the previous 8 months.

The letter of guarantee was prepared and signed by the distributor and was sent to its asset manager, Goldman Asset Management (GAM). The letter of guarantee was sent to the Processing and Payment’s Department of GAM. This department of GAM was mainly concerned with issues such verifying payments, payments to creditors and processing payment cheques for orders. However, the manager of this Department signed the guarantee affixed the stamp of GAM. This guarantee was then sent to Paratol Ltd. Subsequently the stock was delivered by Paratol Ltd. to the distributor.

Paratol tried to recover the amount from GAM. Under the internal procedure of GAM, guarantees are usually signed by Guarantee and Valuation Department. Moreover, the manager of the Processing and Payment’s Department of GAM said that the sign which he had put on the letter of guarantee was only for the purpose of verifying PharmCo’s signature. Thus, according to GAM, guarantee had never by GAM for paying off the amount of $2,000,000 in event of default made by PharmCo.

Relevant Law

Under these circumstances, it can be argued by the manufacturer that the asset manager of the distributor never mentioned in the signed document that the document was not a guarantee letter. The letter which was sent to the manufacturer looked like just another guarantee letter and it was only on the receipt of such guarantee letter the manufacturer had sent the stock to the distributor. The distributor and the manufacturer would be governed by the terms of the contract which was entered into between them and the contract clearly stated that the distributor would have to pay off the debt within 6 months.

Misrepresentation of Fact

The fact that the distributor was running under deficit had been concealed by the asset manager of the distributor. It was completely a fraudulent misrepresentation committed on the part of the asset manager and it was on the basis of that misrepresentation that the manufacturer delivered the stock to the distributor. Thus, the false statement made by the asset manager had induced the manufacturer to deliver the stock which proved to be unfruitful for the manufacturer.

Case Law: Derry vs Peek

In this case it was held that the main constituents of a fraudulent misrepresentation are as follows:

1. If the statement had been made knowing it to be false

2. If the statement had been without believing in the truth of the statement

3. If statement had been made recklessly

In the instant case, the constituents of fraudulent misrepresentation had been met with. The manufacturer relied on the statement given by the asset manager of the distributor and subsequently realised that the statement was false and misleading. The manufacturer also suffered from loss as the grace period for paying off the debt by the distributor ended.

Under the facts and circumstances of the instant case, the manufacturer is entitled to recover the debt of $2,000,000. It can also claim damages for the misleading or deceptive statement made by the asset manager. The asset manager is liable to pay off the debt as per the terms of the guarantee letter. The letter signed by the asset manager would be treated as the letter of guarantee under the facts of the case and the manufacturer would be entitled to recover all the amount and further damages for the fraudulent misrepresentation.

Conclusion

Under a distribution agreement, the parties are free to lay down such terms and conditions as they deem fit. The parties are to be governed by the terms of the contract and the innocent party would be entitled to recover the damages in the event of breach of contract by the other party. Following this principle, the manufacturer is the innocent party and is fully entitled to recover the amount and other damages from the distributor. According to the terms of the contract, the asset manager is liable to pay off the debt since the distributor made a default in the paying off the debt.

Application of the law

Facts of the case

The facts of the case is that some business law students, after the end of their semester, planned to play a joke on Bob. Bob was a lecturer of business law and had taught the students who planned to play the joke on him. Some renovations were being carried on in Bob’s home. Amy was one of the students and he thought that it wold be the right time to play a prank. Accordingly he made a phone call to the Company, Fast Gravel Pty Ltd, said that she was acting on behalf of Bob and ordered for some sand on his behalf. Subsequently sand was delivered to Bob’s garden by the Company and a bill was left in the letterbox of Bob. The bill amounted to $ 200 which included the delivery charge of $ 50. After finding the bill in the letterbox, Bob made a complain to Fast Gravel Pty Ltd and asked them to take away the sand which it had delivered. The Company reloaded the sand and also paid $ 100 to a gardener for replanting some destroyed lawn.

Issue

Whether Amy had done a misrepresentation by giving a false statement to Fast Gravel Pty Ltd, thereby inducing the Company to deliver the sand on Bob’s garden?

Relevant rule

Section 18 of the Australian Consumer Law (schedule 2 of the COMPETITION AND CONSUMER ACT 2010) prohibits a person from engaging into a deceptive or misleading conduct or from engaging into a conduct that is likely to mislead or deceive the other party in trade or commerce. [5]

Under Section 237 of the Australian Consumer Law, the Court may make an order for compensating the loss which had been suffered by an injured party. [6]

Application of the law

In the instant case, A had misled or deceived Fast Gravel Pty Ltd by making a false statement that he was acting in behalf of Bob. The misleading statement induced the Company to deliver sand to Bob. This is clear instance of fraudulent misrepresentation committed by Amy. Under these circumstances the Company has a right to sue Amy for fraud and claim damages for the loss which it has suffered. Firstly the company is entitled to recover the expense of his service of delivering sand which amounted to $200. Secondly the Company is also entitled to recover $ 100 which it had paid to the gardener for replanting the destroyed lawn. Thirdly it is also entitled to recover damages from Amy for any consequential losses which it had suffered as a result of the misrepresentation.

Letter of guarantee

Case law: Wardley Australia Ltd v Western Australia

In this case the Court held that the plaintiff is entitled to recover the financial or economic losses which ithad suffered due to the misleading or deceptive conduct of the defendant. However, the loss needs to be actual loss and not a prospective loss.

Case law: Grande Enterprises Ltd v Pramoko

In this case shares in a company, amounting to $2.25 million was purchased by the plaintiff. There was a provision in theLetter of Offer by the vendor that if the Company failed to list itself in the Australian Stock Exchange or if it was not taken over by a Company which was listed in the Australian Stock Exchange within two years, then the shares would be bought back at the same price by the vendor. In case the vendor failed to buy back the shares, then the defendant would buy back the shares. The fact of the matter was that the Company failed to list itself in the Australian Stock Exchange within two years; neither was it taken over by a Company listed in the Australian Stock Exchange. The defendant and the vendor did not buy back the shares of the Company as had been stated in the Letter of Offer provided by the vendor.

It was held by the Court that the defendant had engaged in a deceptive or misleading conduct. The Court also ordered for the compensation of the loss which had been suffered by the plaintiff.

Thus the principle is clear that a person is entitled to claim damages for the loss which it suffers due to the misleading or deceptive conduct of another person.

Case: La Trobe Capital & Mortgage Corporation Ltd v Hay Property Consultants Pty Ltd

In this case, a loan was made to a customer by the plaintiff on the basis of valuation of mortgaged property by the defendant. The defendant had actually overvalued the property by reason of which the plaintiff had forwarded the loan to the customer. If the property wold have been valued correctly, the plaintiff would have never forwarded the loan. There were more potential borrowers in the market and the plaintiff would have surely given the loan to a potential borrower had the defendant not overvalued the mortgaged property. It was held by the court that the defendant’s conduct was a deceptive or misleading one. Accordingly the plaintiff was entitled to damages for the loss which it had suffered due to the misleading statement of the defendant.

Misrepresentation of Fact

In the instant case, the Company had suffered loss as a result of the misleading statement made Amy. The Company, therefore, has the right to sue Amy to recover the damages for the loss which it has suffered.

Bob was unaware of the phone call and the order which was made to Company. He never participated in such misrepresentation. He was himself very much disturbed by the delivery of the sand and some part of his land was also destroyed. The sand was delivered to his garden without his permission or knowledge and as result he cannot be made liable for any misrepresentation or fraud. Thus, the Company, Fast Gravel Pty Ltd has no ground to sue Bob.

Conclusion

False statement or false representation may induce a person to do something or omit to do something, which he never would have done or have omitted to do if the false statement was not given to him. Consequently, the person by doing such act or omission may suffer some loss or damage. Section 18 of the Australian Consumer Law has been framed to prevent such misrepresentation being done by a person in trade or business. [10]

In the instant case, Amy has violated Section 18 and thus she is liable to pay compensation for the losses which has been suffered by the Company due to such fraudulent misrepresentation. Bob, on the other hand, was not involved in such representation and as a result the Company has no right against him.

In this question a hypothetical situation has been given.

Bob wishes to do some garden improvements. As soon as the Company, Fast Gravel Pty Ltd delivers the sand to his garden, Bob immediately agrees to keep the sand but he does not want to pay the delivery charge of $50.

Issue

Whether the Company, Fast Gravel Pty Ltd can sue Bob for recovery of the delivery charge of $50 or not?

Relevant law

The concept of unjust enrichment has been decided and debated in the Courts of Australia. The High Court of Australia has held that if a person gains benefit as a result of the work done by another person, then he is entitled to pay compensation to the other party for the benefits accrued by him. [11]

Case law: Pavey& Matthews Pty Ltd vs Paul

In this case, the Company, Pavey& Matthews Pty Ltd had a licence under the Builders Licensing Act 1971 (New South Wales). The Company entered into an oral agreement with Paul, in pursuance of which, it supplied some materials and did some work which benefitted Paul. When Company demanded the money for the work done and fro the materials supplied, Paul refused to pay. Subsequently, Pavey filed as suit against Paul for recovering the amount of the benefits which Paul had enjoyed under the oral agreement.

Case Law: Derry vs Peek

Arguments in the case: It was argued by Paul that Section 45 of the Builders Licensing Act 1971 required that all agreements have to be in written form and oral agreements were simply not enforceable. Therefore, a person would not be entitled to any compensation in pursuance of any work done outside a written agreement.

Decision: The High Court introduced the concept of unjust enrichment. It said that it is the responsibility of a person who receives unjust enrichment to pay compensation to the person from whom such benefit has been accrued. This obligation does not arise out of a written contract or an agreement but it is a quasi-contractual obligation and is guided by normative force. Paul has already benefited from the work done byPavey& Matthews Pty Ltd. There was an oral agreement that Paul would pay an amount according to the rates as decided under the practices that are followed in the building industry. Accordingly, a moral obligation arises on part of Paul to pay compensation to Paveyin return of the work which had been done by Pavey. This obligation has no contractual basis but is based on morality and normativity. In pursuance of this principal, the High Court directed Pal to pay compensation to Pavey for the benefits which he had enjoyed.

Application of the law

In the instant case, Bob has gained benefit by the delivery of sand to his garden. Bob wants to do some improvements in his garden and the sand would be highly beneficial for that purpose. There was no agreement between Bob and Fast Gravel Pty Ltd but the fact of the matter is that Bob has been unjustly enriched by the delivery of sand. Therefore, applying the principal which was laid down in Pavey& Matthews Pty Ltd vs Paul, it can be said that Bob has a quasi-contractual obligation to pay the amount for the benefits which he has enjoyed. Now, the delivery charge comes under the charge of services delivered by the Company. This charge has to be paid as part of the compensation to be paid by Bob to the Company.

Conclusion:

Bob’s wishto keep the sand without paying the delivery charge of $50 is not acceptable. If he keeps the sand delivered by the Company he has to pay the delivery charge as well because delivery charge forms part of the service charge and cannot be ignored.

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