Corporate Law For Deceptive Conduct Cases

Most Appropriate Business Structure

Discuss about the Corporate Law for Deceptive Conduct Cases.

There are four business structures that Jack, Jill and Max (hereinafter referred as “the parties”) can opt for to carry on business with. These are a sole proprietorship,[1] a company, partnership or a trust. For the case at hand, the parties have the option of forming a company or a partnership. Whichever structure they settle for, they must take into account their needs. Therefore, before making a recommendation, the advantages and disadvantages of either business structure must be brought to the fore as herein below.

One of the options is to form a partnership by meeting all the requirements of a duly constituted partnership under the Partnership Act (1963) (cth)[2] and case law.[3] Notably, there is also the possibility of incorporating a limited partnership.[4]

The advantages of partnerships are:

They are not liable to taxes because each partner files his own tax returns.[5]

They are flexibility and easy to set up due to the absence of long registration requirements. In the case of general partnerships, there is no requirement for registration before conducting business.

They are not subjected to government scrutiny.

There is readily available capital as each partner contributes towards raising the capital.

Management is easy since each partner plays a role in the management thereby bringing a variety of vast knowledge

Summarily, the disadvantages include the fact that transferability of shares is subject to the consent of the other partners. This poses the risk of dissolution in the event that the partnership deed is silent on the subject of what happens when a partner leaves the firm or dies.

Further, there is a likelihood of a deadlock occurring when the partners cannot agree on management issues and therefore leaving the firm with the only option of dissolution.

Of particular concern is that partnership expose the partners to liability.[6] Being agents of each other, partners in a general partnership are jointly and severally liable for the actions of each other which are done in the normal course of business.[7]

Even for a limited partnership, it is only the limited partners that enjoy limited liability whereas the general partners are subject to unlimited liability to the extent that the partnership cannot offset its liabilities or as set out in the deed.[8] Even then, a limited partner does not engage in the management of the business and should he do so, his liability for any action arising therefrom shall be unlimited.[9]

Partnerships

The three parties can also incorporate a private company limited by shares by complying with the provisions of the Corporations Act (2001) (cth). The disadvantages of this option include much scrutiny and supervision from the government, tedious registration processes and tax liabilities (Sealy and Worthington, 2013).

However, the advantages outweigh the disadvantages and make a company limited by shares the best option for Jack, Jill, and Max. These advantages are:

The company will have a legal personality and therefore capable of owning property and carrying on business in its name and even further, can sue and be sued in its own[10] The company will in essence be a separate legal entity and will not be identified with the persons who own shares in the company or its directors.

The transferability of shares is possible at the option of a shareholder without restraint.

The company shall have perpetual succession and will not dissolve even when a shareholder dies.

Of greater importance is that in a company, the shareholders’ liability is limited[11] to the extent of the unpaid shares subscribed for. Once the shareholder fully pays up for the shares subscribed for, even when the company becomes liable, the shareholder cannot be called upon to make good the debts or liabilities of the company. This characteristic makes limited companies attractive to investors because they are aware that they shall not be personally held liable for the company’s debts. Further, it is easier to acquire credit from financial facilities due to the company’s legal personality.

My advice to the parties will, therefore, be that they should incorporate a company limited by shares to reap the advantages that come with it.

Schedule 2 of the Competition and Consumer Act (2010) (cth) (hereinafter referred to as “the CCA”) prohibits persons in trade and commerce from engaging in misleading and deceptive conduct.[12] Further, section 29 (1) of the CCA provides that persons in trade must refrain from making false and misleading representations that the goods are of inter alia a particular quality or standard.

To conclude whether the conduct is deceptive or misleading, reference is made to the case of Parkdale Customs Built Furniture Pty Lt vs. Puxu Pty Ltd[13] wherein it was stated that the conduct is misleading when a person leads another into error. Further, in Butcher vs. Lachlan Reality Pty Ltd[14], J. Macaulay held that whether the conduct is deceptive or misleading is a fact question and regard must be had to the whole situation in light of the immediate facts and circumstances. In Google Inc.[15] J French reasoned that the words “likely to mislead or deceive” mean that it is not necessary for actual deception to occur.

Advantages of Partnerships

From the foregoing generality, it is conclusive that by informing and assuring the retailers that the toys were free of harmful plastic chemicals whereas they were actually harmful, Betty contravened the provisions prohibiting the making of misrepresentations, misleading and deceptive statements under the CCA.

Upon establishing that Betty’s conduct was misleading and deceptive, it must be proved that the retailers relied on the    Betty’s statement to inform their decision to buy the goods for further redistribution. My considered opinion is that the information relayed by Betty was crucial to get the retailers to accept the goods and distribute to customers, and they are duly in for compensation for the resultant loss of customers.[16]

Generally, an employer will not be held liable for the unauthorized acts of an employee.[17] In Limpus vs. London General Omnibus Co.[18] the “salmond test” was applied and it was stated that to determine whether the actions are to be considered authorized, they must be within the scope of the employment. In the case at hand, as a salesperson, it was within Betty’s authority to give assurances on the product quality. Therefore, Child Toy will be vicariously liable for Betty’s actions.

The penalty prescribed for corporations under the CCA for such false representations and misleading and deceptive conduct is a fine of $1,100,000/=. Child Toy will, therefore, be liable to pay the statutory fine.

Further, Child Toy will also be subjected to product liability. In Donoghue vs. Stevenson,[19] it was stated that once a product manufacturer sells a product to consumers, there is no expectation that the product will undergo further examination. Therefore, the manufacturer will be liable to the ultimate consumers if reasonable care is not exercised in the manufacture of the product.

Keeton (1973) argues that a manufacturer is also liable for negligence for failure to warn of dangerous qualities in the product.[20] In Paterson vs. Merck Sharpe & Dohme Pty Ltd,[21] J. Jessup held that a manufacturer has a duty to warn not only when the risk is known but also when it should have been known. Child Toy ought to have disclosed the crucial information on the safety of the toys and given sufficient warning of the danger. Since they hadn’t disclosed such information, they are liable for damages resulting from the injuries sustained by consumers and to the retailers for losses incurred from the loss of customers.

Also, the toys will have to be recalled from the market in accordance with section 122 of the CCA.

Disadvantages of Partnerships

The contract between Charles and Child toy has a non-compete clause. This clause is usually incorporated in employment contracts wherein employees agree not to start a similar business or join a competitor’s employment upon termination of the current employment (Cross, 2008).

Like any other contract, employment contracts are also to some degree subject to common law provisions. The law position with regards to enforcement of non-compete clauses is as from time-to-time developed by courts (Turnbull and Howman-Giles, 2014).

For Child Toy to succeed in an action against Charles for breach of the continuing restrictive covenant certain prerequisites must be proved. First, Child Toy must establish that the agreement containing the non-compete clause was supported by sufficient consideration. Courts had held that if the contract was signed before the employee commenced his employment; then the subsequent employment will in itself be considered sufficient consideration for the contract, and the non-compete clause will, subject to other requirements, be binding on the employee. However, if the contract was signed after the employee had already started working, the employment in itself will not be a sufficient or valid consideration for the promise not to compete.[22]

There should also be a legitimate business interest being protected such as confidential trade secrets and goodwill (Keen and Jessup, 2012). In Wallis Nominee (Computing) Pty Ltd vs. Pickett,[23] J. Sifris stated that before enforcing a non-compete clause, the employer must demonstrate that there is more than just exposure to and interaction between the employee and the clientele. The connection with the clients must be strong and be including special knowledge of the clients and a significant degree of influencing them. The fact that Charles was the Operations Manager is sufficient to show that Charles had a strong connection with the clients and had access to confidential information and trade secrets.

Finally, a clause in the agreement must be reasonable for it to be enforced. The court, in determining the reasonableness, will give regards to the legitimate interest being protected vis-à-vis the burden on the employee.[24] Factors to be taken into consideration include the duration of the clause and the scope, and that the assessment is done according to each case’s peculiar facts (Cross, 2008).

References

Brisbane Australia. [Online] Holdingredlich.com.au. Available at: https://www.holdingredlich.com.au/dispute-resolution-litigation/levelling-the-playing-field-the-enforceability-of-non-competition-restraints-of-trade [Accessed 2 Sep. 2016].

Business.gov.au (2016). Business structure. [Online] Available at: https://www.business.gov.au/info/plan-and-start/start-your-business/business-structure [Accessed 1 Sep. 2016].

Clarke, G. (2015). Misleading or Deceptive Conduct Cases- Western Australian Developments. Available at: https://barristers.com.au/wp-content/uploads/2014/11/Misleading-or-Deceptive-Conduct-Cases-Western-Australian-Developments-Paper.pdf [Accessed 2 Sep. 2016].

Cross, D. (2008). Enforcement of Non-Competition Obligations – Employment and HR – Australia. [Online] Mondaq.com. Available at: https://www.mondaq.com/australia/x/68980/Contract+of+Employment/Enforcement+Of+NonCompetition+Obligations [Accessed 2 Sep. 2016].

Jackson, J., 1991. Liability of Executive Officers under the Corporations Law, The. Bond L. Rev., 3, p.i.

Keeton, P., 1973. Product Liability and the Meaning of Defect. . Mary’s LJ, 5, p.30.

Keenan, B. and Jessup, N. (2012). Leveling the playing field: the enforceability of non-competition restraints of trade – Holding Redlich Lawyers – Law Firm Melbourne Sydney

Kobras, S. (2010). Business Structures in Australia. [e-book] pp.1-3. Available at: https://www.schweizer.com.au/articles/Business_Structures_in_Australia_ (SK00125445).pdf [Accessed 1 Sep. 2016].

McCarthy, L., 2004. Vicarious Liability in the Agency Context. Queensland U. Tech. L. & Just. J., 4, p.1.

Sealy, L. and Worthington, S., 2013. Sealy & Worthington’s Cases and Materials in Company Law. Oxford University Press.

Statutes

Partnership Act (1963) (cth).

Corporations Act (2001) (cth).

Competition and Consumer Act (2010) (cth).

Cases

Wiltshire vs. Kuenzli (1945) 63 WN 47.

Lang vs. James Morrison & Co. Ltd (1911) 13 CR 1 at 11.

Federal Commissioner of Taxation vs. Whiting (1943) 68 CLR 199.

Re Agriculturist Insurance Co (Baird’s case) (1870) LR 5 Ch. App 725 at 733.

Holzman vs. De Escamilla 86 Cal.App.2d 858, 195 P.2d 833 (Ct. App. 1948).

Lee vs. Lee’s Air Farming [1960] UKPC 33.

Salomon vs. Salomon & Co Ltd (1897).

Parkdale Customs Built Furniture Pty Lt vs. Puxu Pty Ltd (1982) 149 CR 191 at 198.

Butcher vs. Lachlan Reality Pty Ltd (2004) 218 CLR 592 at 625 (109).

Google Inc. vs. Australian Competition and Consumer Commission [2013] HCA 1. 249 CLR 435; 87 ALJR 235; 294 ALR 404NEA Pty Ltd vs. Magenta Mining Pty Ltd (2007) WASCA at 128-129.

Bake vs. JR Perry Nominees Pty Ltd (2012) VSCA 122.

Limpus vs. London General Omnibus Co. (1962) 1 H & C 526.

Donoghue vs. Stevenson (1932) AC 562.

Paterson vs. Merck Sharpe & Dohme Pty Ltd (2010) 266 ALR 1at 295 [799].

Vacwell Engineering vs. BDH Chemicals (1971) 1 QB 88.

Fab’rik Boutique, Inc. v. Shops around Lenox Inc. 329 Ga.App. 21, 25, 763 S.E.2d 492, 495 (Ct. App. Ga. 2014).

Wallis Nominee (Computing) Pty Ltd vs. Pickett (2012) VSC 82.

HRT Holdings Pty Ltd vs. Pearson (2012) FCA 161.