1.Terence studies jewellery design at Charles Sturt University. After he graduates, he sets up a business called ‘Terry’s Terrific Designs’. He employs Peter and Sara, who are also CSU graduates to work for him. Peter is appointed as Supplies Purchaser and Sara as a Designer. Sara shares the design work with Terence himself.
Give Terence advice in relation to the following situations, citing relevant legal authority:
Sara visits Gabby, who wants a brooch designed for her. Sara shows Gabby photos of a number of designs that she (Sara) has executed. Sara forgets to tell Gabby that she works for Terence. Gabby is impressed by Sara’s work, and asks her to design a $ 1 000 brooch in the shape of an elephant. On the next day, Terence phones Gabby and says ‘I have received your order, and will finish the brooch within two weeks’. Gabby says ‘Who are you? I have a contract with Sara’.
Terence tells Peter that the business is over-supplied with gold, and that he should buy only silver. However Peter is having a drink with Mary, a gold dealer who he has often dealt with before on behalf of Terry’s Terrific Designs, who offers to sell 50 grams of gold for $ 1 500, which is a very good price. Peter agrees to buy the gold on behalf of Terence, but when Mary arrives at Terence’s shop with the gold asking for the $ 1 500, Terence refuses to accept the gold or pay her.
Because Peter disobeyed his instruction not to buy gold, Terence fires him on Monday. However Terence does not shut off Peter’s access to the business’ email system until Thursday. On Friday Terence is contacted by Gordon, a diamond seller who Peter had regularly dealt with on behalf of Terence. Gordon says that saying that on Tuesday Peter sent him an email ordering a $ 5 000 diamond on behalf of the jewellery business, which he (Peter) picked up on Wednesday. Peter has disappeared to South America and is untraceable. Gordon is demanding to be paid.
2.Roger Smith owns 92 of the 100 shares in United Chemicals Pty Ltd, a company he registered in 2009. The Company Secretary is his wife, Mary, who owns the remaining 8 shares. They elect Timothy Smith, Roger’s brother, as Managing Director of United Chemicals Ltd. In 2015 the company bought a phosphate processing machine from Industrial Machines Ltd for $ 600 000, payable in three equal instalments in 2015, 2016 and 2017. The contract was in writing and signed by Roger as follows:
For and on behalf of United Chemicals Pty Ltd
Business goes well in 2015 and 2016, and the company is easily able to pay the instalments, but in 2017 a sudden downturn in the agricultural sector causes sales of fertiliser to drop off, and United Chemicals finds that it cannot pay the final $ 200 000 instalment. Roger has received a letter from Industrial Machines suing him personally for the $ 200 000, as the board of Industrial Machines knows that he is wealthy.
One of the steps Roger took in early 2016 to try to improve his business fortunes was to see if he could expand into the area of making explosives. However, Commonwealth legislation prohibits the granting of an explosive manufacturing licence to ‘any person who has a criminal conviction’. Roger was convicted of theft in 2005. Roger establishes another company, Explosive Industries Pty Ltd, of which he owns 99 shares and his wife 1 share, with himself as Managing Director and his wife as Company Secretary. He asks Mary to lodge an application for a licence on behalf of Explosive Industries Pty Ltd with the Commonwealth Department of Industry. The Department has sent a letter declining the application, citing the legislation regarding prior criminal convictions as its reason.
Advise Roger in relation to the claim made by Industrial Machines Ltd and the decision by the Department of Industry, citing relevant law.
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?
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  2 QB 480 case (Carter, 2012).
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.
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.
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.
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  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  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  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).
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.
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.
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.
Freeman& Lockyer v Buckhurst Park Properties  2 QB 480
Gilford Motor Company v Horne  Ch 935
Jones v Lipman  1 All ER 442
Royal British Bank v Turquand (1856) 6 E&B 327
Salomon v Salomon & Co Ltd  AC 22