Legal Issues In Business Partnerships And Agency Relationships Essay.

Scenario 1: Tina and Brad's Business Relationship

1. Tina appoints Brad as checkout operator at her independent garage which she operates as a sole trader. The business operates both as a service station and as a used-car lot.

Tina contracts glandular fever, and during the four months she is off work, she tells Brad that he can order petrol while she is sick. During this period, Brad negotiates supplies with Caltex. Brad orders fuel from Caltex every fortnight. Tina returns from her illness, and tells Brad that he should no longer order petrol and that matters will be conducted as they were before she was ill. However Brad, who enjoys the increased status of dealing with the oil companies, ignores Tina’s instruction, phones Caltex and orders 30 000 litres of fuel. When the truck arrives to deliver the fuel, Tina is furious (as she has already entered into a more advantageous arrangement with BP). She phones Caltex, and denies that there is a contract between her and Caltex, stating that Brad was acting contrary to instructions when he placed the order.

Tina employs Paul as a salesman of the used vehicles. Paul has several years experience in the second hand vehicle market. Tina has a number of vehicles on display, including a 2012 Holden Commodore Wagon, priced at $ 19 000. She does not realise that the vehicle could easily fetch $ 25 000. Paul however does know this, and also that his next door neighbour, Fred, wants to purchase just such a vehicle. Paul says that he needs a vehicle himself, and buys the wagon from Tina for $ 19 000. He then sells it to Fred for $ 25 000;Tina is furious when she finds out what has happened.

Advise Tina as to her legal position in relation to the above situations, citing relevant authority.

2. Simon, George, Sara and Mary were all employed by different IT companies. However, they felt that they could do better if they went into business themselves. They pooled their available cash and drew up a partnership agreement, which stated that each partner had authority to enter into transactions on behalf of their IT firm, which they called Computer Solutions. The firm operates in Sydney and provides a service of storing data for customers. The agreement states that partners have authority to enter into contracts of up to $ 10 000, but that any contract for more than that must be approved unanimously by all partners.

George, Sara and Mary approach you for legal advice in relation to two transactions entered into by Simon, who had acted without referring back to the partners. On was for a 500TB storage drive, bought by Simon on behalf of Computer Solutions, from Sunstar Computer Hardware Ltd, costing $ 12 000.

The other was for a second-hand ute, costing $ 9 000, which Simon ordered for the firm from You Beaut Ute Ltd, on the basis that the partnership should branch into the freight business.

George, Sara and Mary have refused to accept delivery of both the storage drive and the ute and the partnership has been sued by both Sunstar Computer Hardware Ltd and You Beaut Ute Ltd. Give George, Sara and Mary legal advice, referring to relevant statutory and case law authority.

1. Can Caltex sue Tina for the actions of Brad?
2. Is Paul is in breach of his duties as an agent against Tina?

The above two issues are resolved by applying the laws relating to actual express authority and apparent authority and the relevant duties of an agent.

The relationship of a principal and an agent is very unique and works on the principal of agency. A principal is a person who employs an agent and guides his work as per his directions and instructions. The agent must act as per the wish and command of the principal. An agent is the authorized representative of the principal and has power to rake actions on behalf of the principal (Maynegrain Pty Ltd v Compafina Bank, [1982] ). But, an agent is only allowed or permitted to take actions on behalf of the principal and is binding upon the principal if such actions are within the authority of the agent. (Tarr, (2001))

An agent possesses two kinds of authorities. First, the authority which is provided by the principal directly to the agent is called an actual authority (Bell v Australian Eagle Insurance Co. Ltd , (1990)). When the authority is given expressly by the principal to an agent then it is express actual authority and when the authority is given by conduct/gestures, then it is express implied authority. Any act which is undertaken by an agent within his express authority is binding on the principal (Gillies, (2004)). Second, when there is no express or implied authority that is granted to an agent but when the principal make assertions or representations towards the outsiders that the agent does possess some kind of authority to bind the principal, then the authority that is acquired by the agent is called ostensible authority (Ogden & Co Pty Ltd v Reliance Fire Sprinkler Co Pty Ltd, (1973)). (Greig, (1988))

Also, the agent when possess authority can take actions and such actions will make the principal liable for the same. But, while catering the act as an agent, every agent must make sure that he must dealt with his duties with all care and adequate manners (Breen v. Williams, 1996). He has a relationship of trust which he shares with the principal and the same must be maintained in each and every scenario. The agent should not enter into transactions that are not for the benefit of the principal (Daniels v Anderson , (1995)). Also, if any transaction results in making profits to an agent without the approval of the principal then such profits are not allowed and there is breach of duty on account of the agent (Jones v. Canavan, (1972)). (Thampapillai, Tan, Bozzi, & Matthew, (2015) )

Scenario 2: Simon, George, Sara, and Mary's Partnership

These legal principles are now applied to the facts of the case.

Yes, Caltex sue Tina for the actions of Brad.

Brad was the agent of Tina who was appointed to help Tina in her business. Tina gave authority to Brad that when she is not present then he can make purchases of oil from Caltex. Thus, the authority which is given to Brad is directly given to him. Caltex is aware that Brad was given the actual authority to purchase petrol from him on behalf of Tina.

But, this authority is later refused by Tina. Caltex is still in the impression that Brad still holds an authority wherein he can buy petrol on behalf of Tina. So, when Brad later purchased petrol from Caltex, then, such purchase is valid and is binding upon Tina as the same is carried on by Brad under his ostensible authority.

Caltex is of the view that Brad still hold the authority to buy the petrol and he has no ground to know that the authority is been taken away by Tina.

So, Caltex can sue Tina for the purchase of Petrol.

Yes, Paul is in breach of his duties as an agent against Tina.

Tina has no knowledge regarding the value of the second hand vehicle and Paul is an expertise in the same. So, in order to sale out his second hand vehicle, Tina has appointed Paul for the same. Tina wants to sell out one of his vehicle and she estimated that the prince of the vehicle should be $ 19,000 which in reality is under value for the vehicle.

However, Paul is fully aware of the actual worth of the vehicle. Paul is aware that the worth of the vehicle should be $ 25,000. Paul is also aware that his friend Fred is also willing to buy the said vehicle and is willing to pay $ 25,000 for the same. In order to gain profit, Paul brought the vehicle from Tina at the undervalue price and later sold the same to Fred at an aggravated price thereby making profits.

Thus, by doing this Paul is in violating of his duties as an agent. He must act with honest and in good faith. However, he breached the faith of Tina and thus makes profits for himself. So, Tina can sue Paul for the breach of his duties.  

Conclusion

Tina is bound by the contract that is made by Brad with Caltex as the same is valid under the ostensible authority of Brad.  

Principles of Agency and Partnerships

Tina can sue Paul as Paul was in violation of his duties as an agent and he must pay back the extra profit that is earned by him by selling the vehicle at an aggravated price without the knowledge of Tina.

1. Is Simon authorized to take contract on behalf of Computer Solutions?
2. Is  Simon has made a valid contract between computer solutions and You Beaut Ute Ltd?
3. Can computer Solutions deny the contract with Sunstar Computer Hardware Ltd,. If No, then on what ground the contract stands valid?

The above three issues are resolved by applying the laws relating to actual express authority and the principle of common law rule called Indoor management rule.

To create any partnership requires two or more persons with the legal intention to form a partnership with the aim to seek profits while carrying out business with common objective. When these essentials are fulfilled then a partnership is created and the person who has created the same are partners of the firm. Once a partnership is created it results in establishing a unique relationship amid the partners and the firm. (Fletcher, (2007))

The firm runs on the principle of agency wherein the firm acts like a principal and the partners are the firm’s agents. As per the rule of agency, every partner is authorized to act for the firm and the other partners and thus will make them responsible of his actions ( Newstead v Frost , [1979]). So, the firm and the partners are agents of each other ( Hurst v Bryk and Others , [2000]). The partners are authorized to carry out the acts on the firms behalf provided he is authorized to do the same (Thames Cruises Ltd v George Wheeler Launches & Another, [2003]).  When the firm expressly or impliedly grants authority to the partners, then, the partners may make contractual relationship with the third parties and such relationship are binding on all the other partners of the firm and the firm itself. (EGERT, (2007) )

However, any act which is not authorized by the partner is not within the scope of the object of the firm and thus can be held voidable by the firm.

But, when the partner knowing the fact that he is not eligible to enter into a transaction with any third party still exceeds his authority and makes a contractual relationship with him, then, if such contract are avoided by the firm on the ground of excess of authority by the partner, then, it will be a great setback for such an outsider who has no idea regarding the non capacity of the partner (Equiticorp Finance Limited (in liq) v Bank of New Zealand , (1993) ).

Actual Express Authority and Ostensible Authority

To protect the interest of such outsider the rule of indoor management was adopted according to which if any outsider is dealing with the partner of the firm and has good reason to believe that such partner does have the power to bind the firm and is contracting with the outsider within such power, then, any contract that is established amid the two will be binding and cannot be canceled by the firm on the ground that the partner does not have the authority to bind the firm (Bank of NSW v Vale Corp (Management) Ltd, 1981). The only condition that is required is that the outsider must not act in any deceptive manner and his action must be supported by good faith and genuinely, that is, he has no reason to be belief nor has any ground to believe that the partner with who he is dealing does not have the requisite power to bind the firm. (P, (2012))

These legal principles are now applied to the facts of the case.

Yes, Simon is authorized to establish a contract on behalf of computer solutions. Computer solutions is the firm which is established by Simon, George, Sara and Mary and thus as per the law of agency, all the people are partners of the firm and are agents of each other.

Now as per the partnership agreement of Computer solutions, every partner has the power to bind the firm by making contracts with outsiders but this power is restricted to the amount $10,000. However the partner can make a contract exceeding $ 10,000 by seeking prior approval from the remaining partners.

So, Simon has been granted express authority by the partnership agreement and she is authored to make contracts on behalf of the firm.

Yes, the contract made by Simon on behalf of computer solutions with You Beaut Ute Ltd is valid and is enforceable.

Now, Simon has made a purchase of $ 9,000 from You Beaut Ute Ltd. Since, the purchase is justified and falls within the express provisions of the partnership agreement amid the parties, that is, Simon, George, Sara and Mary, thus, the agreement is valid. The partnership agreement of the computer solutions ahs empowered Simon that she can make contract upto $ 10,000 without notifying any other partner and has the actual authority to do so.

So the act falls within the authority of Simon and thus the contract is binding upon Computer Solutions.

Duties of an Agent and Breach of Fiduciary Duty

The computer Solutions cannot deny the contract with Sunstar Computer Hardware Ltd,.

Simon representing the Computer Solutions has entered into a contract with Sunstar Computer Hardware Ltd. the worth of the contract is $ 12, 000. Now, as per the provisions of the partnership agreement Simon is only allowed to make contract without the approval of the other partners provided the worth is up to $10,000. But contract beyond that must be approved by either partner.

Now, when she made a contract with Sunstar Computer Hardware Ltd which is above $ 10,000, she did not take approvals from the other partners.

But, still the contract cannot be rejected or disapprove by Computer solutions because if Sunstar Computer Hardware Ltd can establish that it has reason to believe that Simon can make contract on behalf of Computer solutions and has no ground to establish that it is not acting in good faith, then, it can rely on the common law rule of indoor management and thus sue compute solutions for compliance of the contract.

So, Computer Solutions cannot deny the contract with Sunstar Computer Hardware Ltd.

Conclusion

The contract made by Simon with Sunstar Computer Hardware Ltd and You Beaut Ute Ltd are valid and binding upon computer solutions as the first contract is valid under the indoor management rule and the second contract is valid as the same is as per the partnership agreement of the computer solutions.

Hurst v Bryk and Others ([2000]).

Newstead v Frost ([1979]).

aynegrain Pty Ltd v Compafina Bank ([1982] ).

Bank of NSW v Vale Corp (Management) Ltd (1981).

Bell v Australian Eagle Insurance Co. Ltd ((1990)).

Breen v. Williams (1996).

Daniels v Anderson ((1995)).

EGERT, G. ((2007) ). Defining a partnership: the traditional approach versus an innovative departure ? do queensland appeal court decisions point to the need for a review of the traditional approach to interpretation adopted by australian courts?. Bond Review.

Equiticorp Finance Limited (in liq) v Bank of New Zealand ((1993) ).

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Gillies, P. ((2004)). Business Law. Federation Press.

Greig, D. W. ((1988)). Commercial law. Butterworths.

Jones v. Canavan ((1972)).

Maynegrain Pty Ltd v Compafina Bank ([1982] ).

Ogden & Co Pty Ltd v Reliance Fire Sprinkler Co Pty Ltd ((1973)).

P, H. ((2012)). Principles of Lender Liability. OUP Oxford.

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Thames Cruises Ltd v George Wheeler Launches & Another ([2003]).

Thampapillai, D., Tan, V., Bozzi, C., & Matthew, A. ((2015) ). Australian Commercial Law. Cambridge University.