Legal Issues In Real Estate Business In Melbourne

1a) Business Structure for Mary, Fred, and Chris

Under what type of business structure are Mary, Fred and Chris running the business?

To run any business effectively, the main kinds of business structures are sole trade ship, partnership and a company.

A sole trader ship requires a single person who owns and manages the business. However, since, there are three parties involve, that is, Mary, Fred and Chris, thus, sole trader ship is not the business structure they have entered into.

 A company is a structure which is established only when the same is registered as per the requirements mentioned under the Corporation Act 2001 and the guidelines of ASIC. Since, Mary, Fred and Chris have written down their rules in the form of an agreement on a serviette, thus, there is no registration and thus they are not operating as a company.

Now, as per section 5 of the Partnership Act (vic) 1958, a partnership is the simplest form of structure wherein two or more persons join together to run a business activity of a continuous nature with the main aim to earn profits. Thus, the main elements to run any business as a partnership are: (Steiner, 2017)

1. There must be two or more than two persons – In order to run any partnership it is necessary that there must be two persons.

It is submitted that there are three people with intent to run the business in the form of a partnership, that is, Mary, Fred and Chris. Thus, they are more than two persons and thus satisfy the first requirement of a partnership.  

1. They must run a business activity with common intention – All the partners must carry on the business of the firm with a common intention. In (Re Ruddock & Ors, 2000), the courts submitted that to constitute a partnership the intention of all the partners must be common and it makes not difference whether all the partners are taking part in the firm activities or not.

All Mary, Fred and Chris started business to provide bespoke service to people wanting to enter into the property market. All the three are involve in the management of the business. Thus, there is common intention amid all Mary, Fred and Chris.

1. The business activity must be of continuous nature –In (Ferguson v Federal Commissioner of Taxation , 1979)the court held that a business must be distinguished from a hobby and to constitute a partnership the business must be of continuous nature. But in (Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd , 1974) a single venture with the common intention and with the aim to share profits held to be a partnership relationship.

All Mary, Fred and Chris were carrying on the business in a continuous manner. Thus, there is continuity of the business.

1. The parties must aim to share profits and losses –In (Plummer v Thomas, 2014), P and T entered into a partnership with no aim to share profits. The court held that it is necessary that all the partners must aim to share profits and losses in order to constitute partnership.

It was also agreed as per their written agreement that all Mary, Fred and Chris will equally invest in the business and will share the profits equally. Thus, they were sharing the profits.

Conclusion 

It is thus submitted that all the three, Mary, Fred and Chris, were acting in such manner so that the entire essential to establish a partnership are met. Thus, there is a partnership form of business structure that is run by Mary, Fred and Chris.

Whether Fred and his business partners are liable for the damages suffered by the customer X?

When any partnership is established then the partners are the agent of the firm, that is, the partners represent each other and the partnership firm and vice versa. However, the partner will only bind the other partners and the partnership firm provided the acts that are undertaken by the partner are within his authority. In  (Goldberg v Jenkins, 1889) the partner borrowed money @ 60% whereas the rate was normally 6%-8%. It was held that the act of the partner is out of the scope of his usual authority and is thus non binding on the other partners.

Under the law of partnership the authority can be actual or ostensible. An actual authority is the authority which is expressly or impliedly provided to the partner. In (ANZ Bank Ltd v Ateliers de Constructions Electriques de Charleroi, 1969) the court held that when the agent put the cheque in his account as part of his authority then it comprises within his actual authority and is binding. Whereas in (Construction Engineering v Hexyl Pty Ltd, 1985) the court submitted that when the authority is provided to the partner by some overt act which represents that the partner does posses the authority to undertaken any specific task then it is ostensible authority. In the given case the construction has no reason to believe that Tembel is acting as an agent of Hexyl and thus there is no scope of ostensible authority.

1b) Liability for damages suffered by the customer X

Now, every partner while carrying out his activity as the partner must make sure that he does not act in such a manner so that any harm is caused to his clients. The law of negligence has imposed a duty of care upon the partner which when violated makes such partner negligent. All the others partners and the firm are also considered to be negligent as the liability is jointly and severally liable. Thus, the partner is negligent when:

1. The partner is imposed with the duty of care to provide advice in such a manner so that no loss is caused to his client. The duty is imposed against those client with whom he is sharing proximate relationship and such client is reasonably foreseeable by him.
2. The partner when does not provide advice adequately as expected from him in the like situation, then there is breach of duty of care on the part of the partner. In (Paris v Stepney Borough Council , 1951) the employer does not provide adequate safety measures to his employee resulting in breach.
3. It is also submitted that the partner is negligent provided that some loss is sustained by the client because of the breach of the duty of care on the part of the partner.

Likewise, if any representation is made by the partner which is false and which causes harm to the client then it is an act of negligent misstatements. Thus,

1. If any partner make statement of fact;
2. Such statement of fact is not true in nature and is held in  (Hedley Byrne v Heller, 1964)that when any statements is made negligently than it result in arising claim of economic losses.
3. That the statement made by the partner results in causing injury to the client
4. The client is in special relationship with the partner and is held in (San Sebastian v Minister Responsible for Administering Planning and Assessment Act , 1986)that a speaker does not have any special relationship unless posses skill.
5. That the loss that is caused to the client is not too remote and is reasonably foreseeable by the partner.

If all the above ingredients are met then the partner is held to be negligent in his actions by making misstatements. Once a negligent misstatement is made by the partner then the client has the power to consider any transaction entered by such partner as void. Any injury that is sustained by the client will result in making all the other partners liable provided the negligent misstatement that is made by the partner is made within his authority and power.  

It is submitted that all Mary, Fred and Chris are in the relationship of a partnership and thus they are the agents of each other. Any activity that is carried on by Fred being the partner and agent of the firm will result in making all the other partners jointly and severally liable.

One of the main tasks that is attributed to Fred as that he has to provide advice to the clients on the tax implication of any possible purchases.

It is submitted that Fred must provide advice to X in such a manner so that no harm is caused to his clients. The advice must be such that no harm is caused to his clients as he shares the relationship of proximity with him and that they are reasonable foreseeable.  

In January 2017, he advices X however some mistake is incurred by Fred while providing advice to X.

It is submitted that the duty of care is owned upon Fred against X as they are sharing a proximate relationships. However, the duty is not met by Fred as when the advice was furnished at that time Fred was not aware on the latest ruling of Australian Tax Office (ATO). Thus, the level of care that is expected from Fred is not met by him. The level of care fall short the required level of care expected from Fred considering the fact that Fred is assigned with the tasks of providing tax implications to his clients. He made statements of facts which were not true.

Because of the wrong advice X has to pay extra $ 15.000 in tax. If X would had been aware of the ruling he would not have purchased the property. Thus, because of the negligent advice of Fred, injury is caused to X.

Conclusion 

Thus, there is negligent representation that is made by Fred to X and thus X can sue Fred under the law of negligent misstatements.

1c) Liability for damages suffered by Y

Whether Freed and his business partners are liable for the damage suffered by Y?

In order to make any person liable for negligent misrepresentation, there are three essentials which must be proved. The same are:

1. Duty of care – Duty of care signifies that every person must carry out his acts/omission in such manner so that no loss or injury is caused to any other person. The duty of care is only imposed upon the defendant against the plaintiff provide:
2. That defendant and the plaintiff must share the relationship of proximity, that is, the acts/omission of the defendant fall directly upon the plaintiff and in (McPherson Ltd v Eaton , 2005)the court that a donor and a done are in proximate relationship.
3. That the plaintiff is reasonably foreseeable by the defendant.
4. Breach of duty of care – That once the duty of care is imposed upon the defendant then he must cater such duty with all care and caution. If the defendant failed to comply with his duty of care with the level that is expected from him then there is violation of the duty of care. In  (Woods v Multi-Sport Holdings, 2002)the court held that too much burden on the defendant should not be imposed in order to hold the breach and breach is considered only after analyzing the facts of every case.
5. Damages – When the duty of care is not met by the defendant then it is necessary that because of the breach of the duty of care there must be some loss that is caused to the plaintiff. However, the loss that is caused to the plaintiff must be such which must not be too remote to predict by the defendant. Also, the loss that is caused to the plaintiff should be caused because the acts of the defendant, thus, there must be presence of causation. In (Chappel v Hart , 1998)the surgeon was held liable as he failed to warn the patient and this the loss caused to patient was direct because of the breach of the surgeon & (The Wagon Mound No. 2 , 1967), wherein the court held that the damage caused to the ship was too remote to predict by the company.

It is submitted that Fred and his partners are not liable for the losses that are sustained by Y mainly because:

1. Fred and Y are not in the relationship of proximity nor Fred can reasonably foresee Y while giving advice to X. it is submitted that Fred has given advice to X and not to his friend Y. X has communicated the advice furnished by Fred to Y without seeking the permission of Fred. Thus, Fred is not aware that his advice is transferred from X to Y. Thus, Fred and Y are not in the relationship of proximity nor Fred can assume the resemble forseeability of Y. So, there is no duty of care that can be imposed upon Fred.
2. Even if it is assumed that there is duty of care that is imposed upon Fred against Y, still, there is no negligence misstatement that is incurred by the Fred against Y, because the loss that is caused to Y is not because of the acts of Fred directly. Also, the loss that is caused to Y is too remote to be predicted by Fred.
3. The misstatements that are made by Fred meant for X and not to Y.

Conclusion 

Thus, Y cannot sue Fred for the negligent mis-statement because there is not duty of care that is imposed upon Fred giant Y which is violated by him and which has ultimately causes harm to Y.

Under what type of business structure should Fred, Mary and Chris operate now?

It is submitted that all three, Fred, Mary and Chris, are operating by way of the partnership firm. They all are partners. However, the business is now progressing and thus they need to raise capital. They also want to limit their liabilities. They want to keep the number of investors small and want to choose amid the person who wants to invest in the business. Now, in order to meet the expectation, it is better that they must operate their business as a company and not as a partnership firm.

A company is an entity which is established only when it is registered as per the rules mentioned under the corporation act 2001 and the guidelines lay down by ASIC. A company is a separate legal entity in the eyes of law and is an artificial legal person who has sanctity in law. In (Salomon v. Salomon & Co Ltd , 1897), the court held that once a company is established there are several advantages that can be attributed to a company, that is, it has the capacity to act all the functions like a natural person, such as; it can enter into contracts, pay taxes. The main characteristics of the company are:

1. Limited liability – Once a company is registered, then one of the advantage is that the members of the company has limited liability, that is, the liability is limited to the extent of their shareholding value. Thus, in case any debt is incurred by the company then the members are liable only to pay to the extent of their shareholding and their personal assets cannot be used;
2. Raise capital – It is very easy to raise capital in a company. The company can raise capital by issuing shares of the company.
3. Transferability of shares – The shares in the company is easily transferrable and thus does not restrict the shareholding of the company;
4. The company can decide to whom to allocate the shares and to whom the shares should not be allotted.
5. The company is a separate legal entity in the eyes of law and thus the members, directors and other officers of the company are separate from the company.
6. That company has a perpetual succession, that is, a company never dies. Thus, even if all the officers and members of the company cease to exits still the company is active and living.

Conclusion 

It is thus submitted that all Fred, Mary and Chris must convert their business from the partnership form of business to the company form of business as by doing so their liability will be limited in nature, it will be very easy for them to raise capital by issuing shares and they can choose as to whim the investment is required and to reject others. Thus, a company is the best choice to operate their business.

Does the business have to pay for the car under statuary rules?

Once a company is registered then the directors of the company are considered to be the most important part of the company and is analyzed in Chameleon Mining NL v Murchison Metals Ltd (2012). Section  9 of the Act define a director and as per 198A of the corporation Act 2001 the management of the company is run as per the instructions of the director and is held in (Howard Smith Ltd v Ampol Petroleum Ltd , 1974)(1974).

A company director has the power to bind by the company with his acts only if such act are undertaken by the director within his authority. A director can posses authority either expressly or impliedly or ostensibly and is analyzed in ( Freeman & Lockyer (A Firm) v Buckhurst Park Properties (Mangal) Ltd , 1964) (1964) & (Hely-Hutchinson v Brayhead Ltd , 1968). The court held in the cases that if the director does not possess actual authority then the circumstances can be looked into to find the presence of ostensible authority and if the direct has ostensible authority then he will bound the firm by his actions.

If the company director makes any contract in behalf of the company then such contracts are binding upon the company, but, if any contract is made by the company officer outside his scope of authority then the company can back out by saying that since the contract is under lack of authority, thus, the company is not bound by the same. This results in great hardship to the outsider.

Thus, to bring justice to the innocent outsider, the assumptions under section 128 and section 129 of the Act are laid down. As per section 128, the outsider has the power to assume the assumptions laid down under section 129 provided he himself is acting with honesty and is held in (Northside Developments Pty Ltd v Registrar-General , 1990) wherein the outsider has the knowledge of the irregularity and thus the presumptions were not applicable.

As per section 129 the outsider can presume that the officer with whom he is dealing is appointed adequately and all the statutory requirements are met and is held in (Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd , 1971) 

It is submitted that Mary brought a new car and submits that the company will pay for the car.  It is submitted that when Mary brought the car at that time she was not the director of the company and thus has no authority to buy the car. Thus, the company can deny the liability of the car.

However, the dealer can rely in the assumptions under section 128 and section 12 and submit that before selling the car he has check ASIC which still showed Mary as the director of the company. Thus, he can presume that Mary has the authority ton buy the car on behalf of the company.

Conclusion 

So, the company must pay the cost of the car to the dealer.