In this question, it has to be seen that Mary, Fred and Chris are learning the business under what type of business structure. In this regard, a partnership can be described as a relationship that exists between the persons who are carrying on business in common and with a view to earn profit. This definition of the partnership can be found in the Partnership Act. In view of the definition of partnership, there are three elements that are essential for the creation of a partnership.
(i) Carrying on business
(ii) In common;
(iii) With a view to one profit.
In Smith v Anderson, the Court has stated that carrying on a business means the repetition of acts. Therefore the case of an association that has been formed only for doing one act has been excluded. There should be a series of acts that constitute a business. It was stated by the High Court in United Dominions Corporation Ltd v Brian Pty Ltd. that a single adventure may amount to carrying on business depending on its scope. The next requirement is that the business should be carried on in common. This is also a key element of the definition of partnership. However it is not necessary that and a control should be played by all the partners in managing the affairs of the business. It simply means that the business should be carried on or on behalf of all the partners. The third element that is necessary for the existence of a partnership is that the business should be carried on with a view to earn profit. Therefore, the objective of the business should be to achieve financial gain. However it is immaterial if the venture proves to be successful or not so long as there is an intention to make profit.
In the present case, Mary, Fred and Chris are running the business in common and with a view to earn profit. As a result, in this case, it can be said that the business structure, adopted by them is that of a partnership.
According to the partnership law, all the partners are considered as the agents of the firm. This principle was provided by the court in Re Baird’s case. Now this principle has also become a part of the statutory law. As a result of this position of knowledge is considered that each partner is an agent of the firm and also an agent of the other partners. Hence, if a transaction has taken place in the usual or the normal course of business of the firm and a third-party is not aware of any lack of authority on part of the partner, the law provides that the firm can be held liable as principal of the transaction. As a result, liability can be imposed under contract or tort, on all the partners. As a result in the present case, the liability for the negligent misrepresentation made by Fred can be imposed on the partnership. Therefore all the partners can be held jointly and severally liable.
In this context, negligent misrepresentation can be described as the information or advice that has been given honestly, but it is inaccurate or misleading. In Hedley Byrne & Co v Heller & Partners, the court had stated that the ability exist in tort, negligent misrepresentation under the circumstances where information or advise was sought from the person who has a special skill or judgment and when such person knew or should have known that the other party is going to rely on the information or advise given to it. Similarly in Mutual Life & Citizens’ Assurance Co Ltd v Evatt, the High Court had stated that the duty arises when a person has given information are advised to the other person and it was actively sought or merely accepted by such person regarding a serious matter and the person giving advise knows or should have known that he is being trusted and under the circumstances, it was reasonable for the other party to rely on such information or advise. It is a success action for negligent misrepresentation can be initiated into the below mentioned elements are present:-
There should be a legal duty under the circumstances, which needs a certain standard of conduct to protect against a foreseeable risk.
There should be a breach of this duty as a result of the failure to meet the required standard of care; and
A material injury should have been suffered by the plaintiff due to such breach.
In the present case, Fred had given advice to their client X regarding a property. It was a part of the business of the firm to give advice to their clients. However in this case, while giving the advice, Fred had made a mistake. As a result, X, suffers a loss of $15,000. Under these circumstances, it is clear that the negligent misrepresentation has been made by Fred. The law provides that in such cases all the partners are jointly and severally liable. Therefore in the present case, Fred and his business partners are jointly liable for the damages suffered by X.
The issue in the present case, is if Fred and his business partners can be held liable for the damages suffered by Y as a result of relying on the negligent misrepresentation that was made by Fred to X. Hence, it needs to be seen if Y as a cause of action against Fred for the loss of $18,000 suffered by him as a result of relying on the negligent misrepresentation made by Fred. For this purpose the requirements of negligent misrepresentation also need to be discussed. In this regard, a successful claim for negligent misrepresentation can be brought by the plaintiff if the below mentioned elements can be established.
For this purpose, it needs to be established a representation was made by the defendant in the course of his business or in a transaction in which the defendant had pecuniary interest;
False information was supplied by the defendant for the guidance of other persons in their business transactions;
There was a failure on the part of the defendant to exercise reasonable care of competence while providing the information;
It was justifiable for the plaintiff to rely on the representation; and
The negligent misrepresentation made by the defendant can be described as the proximate cause of the injuries suffered by the plaintiff.
Therefore, the law provides that the action for negligent misrepresentation can be initiated only by the party to whom the misrepresentation was made. The meaning of this legal position is that only persons who were intended to receive the advise or information can bring an action for negligent misrepresentation. This position has been explained by the court in Peek v Gurney. In this case, the plaintiff sued the directors of the company for indemnity. However, the action of the plaintiff failed. The court discovered that the plaintiff was not the party to whom the representation was made. The law requires that in such cases, the representation should have been received directly by such a party. However, it is sufficient that the representation has been made to another party with the intention that the presentation could be made known to a subsequent party, and ultimately acted upon by such party.
On the other hand, after going through the facts present in this question, it becomes clear that Y was not the intended party to receive the representation. As a result, Y does not have a cause of action against Fred and his partners for the loss suffered by him, because he had relied on the advice given to X.
The main business structures that are available in Australia are sole trader, partnership, company and a trust. In the present case, it appears that Fred, Mary and Chris had been running their business as a partnership. However now it is advisable that they should run their business as the company. For this purpose, they need to incorporated company. This decision has been made of going through the advantages and disadvantages available in case of all the business structures. It can be said that the business structure of company will be most suitable for the parties in the present case. Although each business structure has its own advantages and disadvantages but in the present case the business structure of the company will be most suitable for the parties. A company is present as a distinct legal entity. Therefore it is separate from its owners (shareholders) and those who have the responsibility to manage the affairs of the company (directors). As a result of this legal position, generally the shareholders and directors of the company are not considered as being personally liable for the deaths of company. The exception present to the general rule, which provides that the directors cannot be held personally liable for the debts of the corporation can be found in the provisions dealing with insolvent trading as mentioned in the Corporations Act, 2001. Essentially, in case of insolvent trading, the company a debt in incurred by the company at a time when reasonable grounds are present to suspect that the company is no longer in a position to pay its debts as and when they become due. The regulatory body in case of the companies in Australia is the Australian Securities and Investments Commission. The ASIC also has the responsibility to administer the provisions of the Corporations Act, 2001. Among other things, it is also the name of the ASIC to protect the consumers and businesses while dealing with companies and to make sure that the companies in Australia operate according to law, maintained proper records and report their activities. The ASIC also has the responsibility to maintain the information database which contains the details of all the companies in Australia.
As mentioned above, if business structure has its own advantages and disadvantages. In the same way, there are certain advantages and disadvantages associated with the incorporation of a company. However in the present case, the advantages of incorporating a company are significant for Fred, Mary and Chris. Therefore it is advisable that they should form a company for the purpose of running their business. The advantages that will be available to Fred, Mary and Chris after the incorporation of a company can be described as follows:-
Limited liability: the law provides that a sole trader or a partnership is legally responsible for all the aspects of the business which includes the debts and losses of the business. Similarly, if a defective product is sold by the business or an error is made or a customer suffers an injury during the course of business, in such a case the sole trader or the partners will be held personally liable. This may even result in losing all the personal assets. On the other hand, in the eyes of law company is a separate legal entity. Therefore the members of the company can protect their personal assets from the liabilities of the business.
Minimize tax liability: the current rate of tax for companies in Australia is less as compared to the rate of tax that is applicable in case of individuals. Therefore, the sole traders have to pay tax at the same rate as the individuals. On the other hand, the tax burden may be reduced significantly after registering a company. Similarly companies and small businesses have been provided with a wide range of tax deductions for education and training, advertising, maintenance and repairs that cannot be claimed by the individuals.
Avoiding conflict with founders: whenever there is a conflict between the founders, registering a company can help significantly. After the registration of a company, the owners of the company are limited to the number of shares purchased by them. In this way, the owners of the company will clearly understand that their investment is decided on the basis of the number of shares owned by them and not on the basis of any pre-registration agreement made verbally or in writing.
Increases brand image: All the major brands in the world are registered companies. Therefore, the registration of a company also increases the reputation and the perception of the business. At the same time, the business structure of the company also establishes accountability.
Raising capital: After the registration of a company, the ability of the business to attract investors and to raise money for business also improves. The registration of the company provides a chance to borrow and to incur debt. But more significantly can sell shares and raise equity capital. Raising money can be necessary for the expansion of the business. Moreover, investors also prefer to invest in a register company instead of investing in a sole trader or a partnership. The reason is that the investors are aware of the fact that a formal structure is present to accept their investment.
Therefore, after going through, the benefits that are available in case of the evaporation of a company, it can be devised that Chris, Mary and Fred should run their business as a company.
The issue in this question is that Mary had entered a contract with a car dealership and has left the country. At the time of entering into the contract, the car dealer was not aware that Mary had left the business and resigned as the director of the company. As a result, the question arises if the contract can be enforced against the company.
In this regard, the common law provides that when an outsider enters into a contract with the person who purports to be acting on behalf of the company, but such person does not have the necessary authority, the contract can be avoided by the company. However this was considered as a harsh outcome. Therefore the court provided the indoor management rule in Royal British Bank v Turquand. According to this rule, when an outsider is dealing with a company in good faith and without having any knowledge on reasonable grounds to suspect regarding the presence of any irregularity or impropriety, the outsider will not be affected by the presence of an actual irregularity or impropriety in a matter of internal management of the company. This rule has also been interpolated in the Corporations Act, 2001. As a result, section 129 of the Act provides these statutory assumptions that can be made by the outsiders while dealing with the company.
A company can enter into contracts with a third-party either directly or through an agent. The contract, created by the agent will be binding on the company unless the agent did not have the authority to enter a binding contract on behalf of the company. Even if the agent has the authority, section 129 can still be of assistance. According to section 128 of the Corporations Act, the persons who are dealing with the company through an agent, are entitled to make certain assumptions. It it is easier to rely on was held by the court in Lyford v Media Portfolio Ltd. that it is easier to rely on the statutory assumptions instead of using evidence regarding these matters. Similarly, individual directors of the company, managing directors and company secretaries are always treated as the agents of company. According to section 129 of the Corporations Act, the law allows a person to assume that a person who has been held out by the company as an officer or an agent of the company has been properly appointed and also has the authority to enter into a contract on behalf of the company.
In the present case, Mary had decided to leave the business and resigned. However after resigning from the company as its director, Mary decided to give ourselves a farewell present. She goes to a car dealership and purchase is a new car. She asks the car dealer to charge the price of the car from the company. Before entering into the contract, the car dealer checked the online database of ASIC in which Mary had been mentioned as the director of the company. Therefore, the car dealer gives the car to Mary. However, Mary has left the country, and the car dealer wants is the contract against the company. On the other hand, the company wants to claim that Mary was no longer a director of the company when she entered into the contract. But in view of the indoor management rule, as well as the application of section 129 of the Corporations Act, it is available to the car dealer to make an assumption that Mary had the authority to enter a contract on behalf of the company. Moreover, representation has been made by the company to the ASIC regarding the authority of Mary as the director of the company. Under these circumstances, it is clear that it can be assumed by the car dealer that Mary had the authority to enter the binding contract on behalf of the company. As a result, the contract created by Mary purchase the car is binding on the company. As a result, the car dealer can pursue the company for the debt. In view of the statutory assumptions mentioned in section 129, the company cannot deny that Mary does not have the authority to create a binding contract on behalf of the company. Hence, the business will have to pay for the car according to the statutory rules.
Graw, Parker, Whitford, Sangkuhl and Do, Understanding Business Law 7th ed LexisNexis Butterworths, 2015
Latimer, P, Australian Business Law CC, 2016 Edition
Lipton P, Herzberg A and Welsh, M, Understanding Company Law, 18th edition 2016 Thomson Reuters
Stephen Graw, 2011, An Introduction to the Law of Contract, 7th Ed., Thomson Reuters
Sweeney, O’Reilly & Coleman, 2013, Law in Commerce, 5th Ed., LexisNexis
Vermeesch,R B, Lindgren, K E, Business Law of Australia Butterworths, 12th Edition, 2011
Case Law
Duke Group Ltd v Pilmer (1999) 31 ACSR 213
Hedley Byrne & Co v Heller & Partners [1964] AC 465
Lyford v Media Portfolio Ltd (1989) 7 ACLC 271
Mutual Life & Citizens’ Assurance Co Ltd v Evatt (1968) 122 CLR 556
Peek v Gurney (1873) LR 6 HL 377
Re Baird’s case (1870) LR 5 Ch App 72
Royal British Bank v Turquand (1856) 6 E&B 327
Smith v Anderson (1880) 15 Ch D 247
United Dominions Corporation Ltd v Brian Pty Ltd. (1985) 157 CLR 1
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