Whether the personal assets of Steve can be held liable in respect of breach of contract as sued by Volvo Trucks (Australia) Ltd. And Thor Mining Machinery Ltd.
A corporate is a separate entity (Amoolya, 2015). In the view of the law, the same is treated as an artificial legal person, which means that law gives birth to a company but with the characteristics of a legal person. This is the reason that a company can run a business as an individual. The same can develop contracts, can purchase and sell assets and can do all the business transactions in it is own name. A company can sue to other persons and other persons can sue a company (Dine and Koutsias, 2014). In Australia, the legislation, which provides provisions and rules related to companies, is the Corporations Act, 2001 (Cth). According to the section 119 of the Corporations Act, 2001, company come into existence after registrations and upon registration only, the same becomes a separate legal entity (Australian Government, 2018).
Promoters are the important person of a company. These are the person who forms a company and in the due course of formation of the company, enters into a contract with third parties. Promoters enters in these contracts on behalf of the company that does not exist, therefore such agreements are known as Pre-registration contract (Bottomley, Hall, Spender, and Nosworthy, 2017). Section 131 of Corporations Act, 2001 says that if company wants then the same can ratify the pre-registration contracts of it is promoters within a reasonable time limit (Australian Contract Law, 2018). Further, it is not mandatory for the company to ratify all the pre-registration contracts. If a company does not ratify such pre-registration contract then, the company cannot be held liable for the performance of these contracts and the promoters who have developed this contract will be held personally liable (Law Central, 2018). Further, section 131 (3) states that a situation where a company get registered and does not ratify the contract, but take some advantages from pre-registration contract, then in such a situation the court can be held the company liable for the part of damages (Austili, 2018).
Therefore the three situations can be there as following:
|
S. No. |
Circumstance |
Result |
|
1. |
When company do ratify the Pre-Registration contracts |
Company will be liable |
|
2. |
When company do not ratify the Pre- Registration contracts |
Promoter will be liable |
|
3. |
When company do not ratify the Pre- Registration contracts, but take advantage out of such contract |
Company will be liable proportionally, for the damages. |
In the given case, Steve, the promoter of the company has made a contract with Thor Mining Machinery Ltd to purchase a drill machine of $ 125000. Steve has entered into this contract as on 06th July on behalf of the company “WA Gold Exploration Ltd.” which was incorporated on 10th July. It means this was a pre-registration contract. When the company has incorporated, the board of directors of the same has decided to form a recommendation committee and this committee has further suggested that company should purchase the drill machine from United Mining Machinery Ltd, which is selling this machine for only $ 100000. This was the reason that the company has not ratified the previous contract that Steve has developed with Thor Mining Machinery Ltd. Applying the provisions of Corporations Act, 2001 as described in the rule section, the company will not be held liable for this contract as the same has not ratified this pre-registration contract.
Further, the company has also made a contract to purchase 5 trucks from Volvo Trucks (Australia) Ltd. The company has entered into this contract, as on 14th July. This was a post-registration contract as company has come into existence on 10th July it has seen that this would not be in favor of company’s working to purchase the trucks as company did not has enough asset to pay out the costing of trucks and therefore the company has breached the contract with Volvo Trucks (Australia) Ltd . As a company is a legal person, the same will be held liable for all it is deeds and acts. In such a circumstance, only company will be held responsible for the breach of contract.
Conclusion
Two contracts have breached in this case with various parties such as Thor Mining Machinery Ltd, United Mining Machinery Ltd, and Volvo Trucks (Australia) Ltd. Steve has developed the contract with Thor Mining Machinery Ltd, in the capacity of a promoter. As the company has not ratified this contract, therefore Steve and his personal assets will be liable for the breach of contract. In the case of the second contract that is developed between the company and Volvo Trucks (Australia) Ltd. The company was liable in respect of the performance of this contract being a separate legal entity. As the company has breached this contract, hence the company will be liable not the promoter Steve and his either assets.
The issue of this case is to check that whether partnership firm and other partners will be held liable for the following act of Simon
(a) Purchase of hard disk worth $ 15000.
(b) Purchase of ute costing $ 9 000
In a partnership firm, partners act as an agent of the firm. This agency can be expressed or implied. In an expressed authority, a well-defined authority is granted to the partner. On the other side in the case of an implied authority, due to acts of partners, it is assumed that they have a level of authority. Partners have a fiduciary duty towards the firm and other partners. The principle of agency applies in a partnership; this is the reason that for an act of a partner, the firm itself and other partners are responsible. However, this is to state that the firm and other partners will be liable only for the acts that are done in a usual business of the firm. If a partner does any act that is not related to the ordinary course of business of the firm, then only he/she will be responsible not the firm and other partners.
Further, many of the times, partners decide their mutual authorities and liabilities related to partnership business. Section 24(5) of the Partnership Act 1892 (NSW) says that in usual every partner takes part in the decision making the process of a partnership firm (New South Wales Government, 2018). A third party cannot have a look to inside management of the fir. Such a third party cannot know that which partner has what powers in a firm. This is the reason that a third never required to know about the authority of a partner. It was given in the decision of the case of Mercantile Credit Ltd v Garrod [1962] 3 All ER 1103 that if a partner works outside the provided authority; but the act is related to the ordinary business of the firm, then in such circumstance firm and other partners will be liable for the act of partner who acted outside of the authority.
To summaries the provisions of Partnership Act, this can be stated that the firm and other partners will only be held liable where a partner do the act within the nature of partnership firm’s business regardless the authority granted.
In the given case, partners of the firm have decided that no individual partner will have authority to do any transaction or to enter into any contract value of more than $ 10000. This firm was engaged in the business of providing data storage services. Later on one of the partners of the firm, Simon has entered into a business transaction to purchase a hard disk from Sunstar Computer Hardware Ltd that had to cost worth $ 15000. Purchasing of a hard disk is related to the ordinary business of the firm. Although Simon could only enter into a transaction up to the value of $ 10000 according to the internal decisions of the firm, yet the third party i.e. Sunstar Computer Hardware Ltd could not be aware with such limitation. Applying the case of Mercantile Credit Ltd v Garrod the firm and other partners are liable for this purchase transaction.
Further, in the second situation, Simon has purchased a second-hand ute worth $ 9000. Although the value of ute was less than what was prescribed i.e. $ 10000, such purchase was not related to the ordinary business of the firm. According to the provisions of the Partnership Act, the firm and other partners will not be held liable for this transaction. As it is implied that the third party could have the knowledge about the nature of firm’s business, hence it was his/her responsibility to check the consequence before doing any transaction with any partner of the firm.
Conclusion
To conclude the issue involve, this can be stated that in the first scenario, where Simon acted according to nature of the business but outside of the agreed authority, all the partners and firm will be liable for the purchase transaction. The reason behind this, that the third party was unaware of the internal decision of the firm. However, in the second transaction, Simon acted outside the boundary of business objects, therefore, neither firm nor the other partners can be held liable for any obligation. Therefore Simon will be personally liable towards the seller of a second-hand ute.
References
Amoolya. (2015) The Concept of Separate Legal Entity in light of Corporations. [online] Available from: https://www.lawctopus.com/academike/concept-separate-legal-entity-light-corporations/ [Accessed on 25/08/2018]
Austil., (2018) CORPORATIONS ACT 2001 – SECT 131. [online] Available from: https://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s131.html [Accessed on 25/08/2018]
Australian Contract Law. (2018) Corporations Act 2001 (Cth). [online] Available from: https://www.australiancontractlaw.com/legislation/cthcorporations.html [Accessed on 25/08/2018]
Australian Government. (2018) Corporations Act, 2001. [online] Available from: https://www.legislation.gov.au/Details/C2018C00275/Html/Volume_1#primary-content [Accessed on 25/08/2018]
Bottomley, S., Hall, k., Spender, P., and Nosworthy, B. (2017) Contemporary Australian Corporate Law. UK: Cambridge University Press,.
Corporations Act, 2001 (Cth).
Dine, J., and Koutsias, M. (2014) Company Law. Macmillan International Higher Education.
Law Central. (2018). The Enforceability of Pre-Registration (Pre-Incorporation) Contracts. [online] Available from: https://lawcentral.com.au/LCNewsArchive/LCNewsIssueDetails_Public.asp?NormalViewIssueNumber=651 [Accessed on 25/08/2018]
Mercantile Credit Ltd v Garrod [1962] 3 All ER 1103
New South Wales Government. (2018) Partnership Act 1892 No 12. [online] Available from: https://www.legislation.nsw.gov.au/#/view/act/1892/12/historical2004-04-05/full [Accessed on 25/08/2018]
Partnership Act 1892 (NSW)
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