Contract Law For Issue Of Payment Liability

Fiduciary Duty among Partners in a Partnership Business

Discuss about the Contract Law for Issue of Payment Liability.

With respect to the issue of payment liability it is first essential to understand that this business structure is that of a partnership (Harris, 2009). There is fiduciary duty that exists between partners, when it is an agent of the firm one of the partners is acting, the a duty will be owed by such partner to the other and in the same manner the other partners too shall owe a duty towards such partner (Phillips-Higgins v Harper, [1954]).

The Section 5 of the Partnership Act (Cth.) states that a firms partner is an agent of the firm as well as the other partners and the other partners are its agents for the purpose of the business of the partnership. Any act which the partner is carrying out which is in the usual course of the business which the partnership firm is carrying out of which such a partner is a member (Bevan, 2007). Then in that case any such act of the partners shall be binding on firm as well as the other partners of the firm provided however there is no authority of the person to be acting on the behalf of the firm and the person who is dealing with such a partner either is aware of this fact or has a reasonable doubt that the person has no authority or does not believe that the person is a partner (Fisher, Wiseman and Anderson, 2001).

For a firm to be held liable when one of the partners of a firm acts without any authority then the four requirements that have been stipulated under section 5 are to be fulfilled. The first requirement being that the act or the transaction had been entered into by a partner. It should be within the firm’s scope of business that the act or transaction should fall under. The third being that the transaction should be such that it is one that is conducted in the usual way (Fletcher and Fletcher, 2007). The final required being that the third party either knew or believed the person to be the firm’s partner, or was not aware of the fact that such an individual did not have the authority to enter into the transaction (Hamilton, 2000).

Thus, it can be stated conclusively on the application of rule of law to the facts and circumstances of the case that there would be a liability for payment by all the partners including the firm for Leon’s act.

Conditions for a Firm to be Liable for Actions Done without Authority

Further, it must be noted with respect to the termination of an employee, that it is not legally valid to terminate the employment of a person without there being any valid justification for the same. Other, than this even when employment is being terminated it is required that a notice period which is reasonable must be provided or payment in lieu of such notice period must be provided. If however, such a termination takes place the same shall be actionable before the court of law.

Therefore it can be stated conclusively that if there is termination of the employment by the three partners, then there may be an action for unfair termination that may be brought against them and the partners along with the firm may be sued for damages.

If there was a contract that was made under the common law with a third party and the person who purported to be acting on the company’s behalf did not have the authority then in that case the contract was voidable at the instance of the company. This rule was extremely harsh, especially for the creditors of the company who dealt with the company in good faith and who could not establish if the requirements to enter into the transaction had been satisfied.  The Indoor Management Rule (“IMR”) was developed in the case of Royal British Bank v Turquand (Royal British Bank v Turquand, [1856]) (“Turguand’s Case”) to deal with such an issue.

The tenet that is fundamental with the agency law is that the agent’s actions shall be binding upon the principle only where such actions are within the apparent, deemed or actual authority which has been given to the agent or which the agent already has (Dal Pont, 2001).

It is provided under the business corporations context with respect to IMR is that:

“a person dealing with a corporation has no obligation to ensure that a corporation has gone through any procedures required by its articles, by-laws, resolutions, contracts, or policies to authorize a transaction or to give authority to a person purporting to act on behalf of the corporation (Pacific National Investments Ltd v Victoria (City), [2000]).”

The compliance of procedures such as these as per Professor J Anthony VanDuzer, is a matter that are internal or with respect to the management that is indoor with which there is no concern that the outsiders need to have (Fletcher and Fletcher, 2007). It was in the Turquand case, as discussed above, that there had been for the first time the articulation of this general principle. In ths aid case, the directors of company were authorized through its settlement deed that was registered for borrowing fund which might be authorized through general resolutions from time to time. The money was borrowed by the directors from the banks of the plaintiff and a bond had been issued under the company’s seal. There however, was no resolution that had been passed by the company for the authorization of the loan or of the bond.

The Indoor Management Rule and Its Application in Contract Law

The main issue that came before the Court of Exchequer Chamber was that whether there was a requirement of the bank for determining whether the company had passed a general resolution which had been adopted actually. It was opined by Chief Justice Jervis in this case that:

“We may now take for granted that the dealings with these companies are not like dealings with other partnerships, and that the parties dealing with them are bound to read the statute and the deed of settlement. But they are not bound to do more. And the party here, on reading the deed of settlement, would find, not a prohibition from borrowing, but a permission to do so on certain conditions. Finding that the authority might be made complete by a resolution, he would have a right to infer the fact of a resolution authorizing that which on the face of the document appeared to be legitimately done (Royal British Bank v Turquand, [1856])”

The harsh implication of the doctrine of ‘constructive notice’, was served to be qualified by the Turquand case, under which any person who was conducting with the corporation was deemed to know about any restriction that may be there on the agent’s authority which would be contained in the by-laws and articles of the corporation.

It was in the case of  Mahony v East Holyford Mining Co (Mahony v East Holyford Mining Co, [1875]) that the House of Lords endorsed the Turquand case and this came to be knows subsequently as the ‘indoor management rule’. It has been stated in this case by Lord Hatherley that:

“[The articles and by-laws of a corporation] are open to all who are minded to have any dealings whatsoever with the company, and those who do so deal with them must be affected with notice of all that is contained in those two documents.

After that… all that the directors do with reference to what I may call the indoor management of their own concern, is a thing known to them and known to them only; subject to this observation, that no person dealing with them has a right to suppose that anything has been or can be done that is not permitted by the [articles or by-laws]…

[W]hen there are persons conducting the affairs of the company in a manner which appears to be perfectly consonant with the articles of association, then those so dealing with them, externally, are not to be affected by any irregularities which may take place in the internal management of the company. They are entitled to presume that that of which only they can have knowledge, namely, the external acts, are rightly done, when those external acts purport to be performed in the mode in which they ought to be performed (Mahony v East Holyford Mining Co, [1875]) “

Employee Termination without Valid Justification

After the Mahony decision of the court the IMR was made applicable through the world of common law.

The IMR states that when a third party is dealing with a company in good faith without any notice of ground being there reasonably for suspicion of any irregularity or impropriety then under common law there will not be any impropriety or irregularity which shall effect it. This would be internal matters of the company then. Relief is provided under this rule to third party that the internal actions of the company are not required to review and it may be assumed that they have been fulfilled.

There are certain assumptions which can be made by the third party while it is contracting with the company. These assumptions are as mentioned below:

• The directors board meetings had been held and conducted in a manner that was proper;
• There were defects in the procedure of the appointment of the director; and
• There has been obtained any required board meeting or general meeting under the replaceable rule or the constitution.

Exceptions to the IMR are (Krawitz, 2016):

There however, exist certain exceptions with respect to the IMR. These assumptions deny the right to the third to claim protection under the IMR and the company can make such contract void at its own instance. These exceptions are as mentioned below:

The “Put on Inquiry” exception, if the third party had not made reasonably inquiry that any reasonable person would make, then the court will not apply the IMR.

IMR benefit cannot be obtained by an insider, in the Morris v. Kannsen there were two reasons that were enumerated by the court (Morris v. Kannsen, [1875]). First being that under IMR position of Director is not same as a third party. The purpose of the rule is protection of third party who does not know company’s internal workings therefore a director cannot take relief under it. The second narrower reason is that a directors transaction with the company is a in a way transaction in itself. Hence, the not knowing advantage is not to be claimed.

The Actual Knowledge Irregularities, if there was an actual knowledge that the person had with respect to the irregularity then the IMR would not be applicable.

The company is not to take the benefit of IMR, this protection is granted to only those people who would not be able to know the company’s internal workings.

The IMR under Corporations Act (Cth.) has been contained in section 128 and 129 though some application of this rule still remains to be incorporated (Bank of New Zealand v Fiberi Pty Ltd, [1994]). In cases where the section 128 and 129 would not be applicable reliance can be placed by the third party on IMR.

The main purpose of these provisions was to ensure that the third party who are dealing in good faith with people purported to have authority is protected from claims by the company later that such authority was not there. There is protection which is provided under section 128 and 129 of the Act to the third party and certain assumption have been allowed to be taken by them when they deal with companies (Fridman, 2016). However, if they were aware or suspected some irregularity then these sections cannot be relied on. There is a certain overlapping between the assumptions under a statute and those under common law.

The parliament has through its decision introduced a change in the statutes so that the law which relates to the rule of “business convenience” is adjusted. The statutory assumptions recognize that the individuals’ transactions with the companies form a fundamental party of the economic society. Thus there is some kind of inadequacy with the decisions that had been taken in the 60s and 70s to the situation currently (Griggs, 2016).

It was stated in the case of Morris v Kanssen by Simonds LJ that unless an assumption is allowed that, that which appears to be in order is actually in order the business wheels will not turn. It was stated with respect to the Common Law rule of IMR by Kirby P that some exceptions were there that this rules needs to be subjected to, and though this rule is very old it is still important for ensuring that the business runs smoothly. It was also further stated by him that not only is this rule a necessary requirement but also that there should be more importance that should be placed on it.  The parliament recognized this importance of IMR and attempt has been made by it to form a legislation which it turn provided with more effect of the rule which the Turquand case had established. There the statutory assumptions which have been given under the Act’s 128 and 129 are essential. Further, it is also submitted there is an increase importance which is being placed on these statutory assumptions.

Therefore, conclusively it can be stated that the universal and unconditional goal that law has is not the third party’s protection which is transacting with a company at the expense of all the other competing considerations. There is relief which this rule allows to the third party from the requirement of inspecting whether the internal management of the company is sound and whether all the requisite requirements for a particular transaction have been fulfilled by the company. The law requires that there must be protection that is given to the third party. However, it is necessary that such third party must be acting in complete good faith and innocently. Thus, this is the reason why a balance is sought to be achieved between the statutes and this is the main reason as to why there has been a formulation of the “business convenience” rule. This business convenience rule established is a deviation from the previously established wherein if there was a contract which was entered by a third party with a company through a person who purported to be acting on the behalf of the company. If the company later stated that such a person was not acting on the behalf and there was no authority that the person had to act in the said manner, it was then the discretion of the company to make the contract void at its instance. This had a very negative effect on the right of the creditors especially who were contracting with the company under good faith. However, after the establishment of the IMR there has been a change in this rule and there is protection that is now granted to the third party against the company under such situation where it is in good faith that the contract has been entered into by the third party.

References

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Montevento Holdings Pty Ltd & Anor [2012]246 CLR 325.

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