LAWS5042 Common Law

Whether it is possible for the Thor Mining Machinery Ltd and Volvo Trucks (Australia) Ltd to take action against the Steve for breach of contract?

Law

Common law discuss the concept of pre-registration contracts, and as defined by the common law when any individual sign the contract on behalf of the organization which is not yet registered then such contracts  are known as the pre-registration contract.

Corporation Act 2001 also recognizes the concept of the pre-registration contract in sections 131, 132, and 133 of the Act.

Section 131 of the Act states that in case any person sign the contract on behalf of the organization which is not yet registered, then organization gets bound by the contract and also holds the right to get its benefit, if such contract is ratified by the company within reasonable time period or time period agreed between the parties.

Clause 2 of this section states that any person who enters into the contract on the basis of the organization is liable to pay amount to the third party-

• If company fails to get registered or
• Fails to rectify the contract within the time agreed between the parties at the time of signing the contract or within the reasonable time period.

In such case, amount required to be paid by the person is equal to the amount paid by the company in case company ratified the contract and fails to perform it.

The actual impact of this section is that it allows the third party to enforce the pre-registration contract against the organization who ratified the contract, and in case organization does not ratified the contract then third party can held the promoter personally liable to pay the damages. Important case law in this context is the Kelner v Baxter (1866) LR 2 CP 174, as in this case advocate of the organization enter into contract with the third arty on behalf of the company, and when company fails to perform its obligation then advocate as the promoter will held liable.

It must be noted that, in case company changed their name then also organization is held liable. This can be understood through the case law Commonwealth Bank of Australia v Australian Solar information Pty. Ltd. (1987) 5 ACLC 124.

Section 131(1) of the Act states the provisions related to the ratification of the contract after the registration of the organization. As per this section in case any individual sign the contract on behalf of the organization before the registration of the organization, then such organization only becomes bound if such contract is ratified by the organization after registration.

In other words, if person signed the agreement then such person is liable to fulfil their contractual duty in case company fails to rectify the contract. In case promoter fails to meet their contractual obligations then under section 131(4) person is liable to pay the damages required by the other party. Court also holds the power to impose second liability in context of the promoter. 

Section 131 and 132 of the Act directly impact the rights and duties of the promoters. Section 132(1) of the Act states that promoter is not liable to pay the damages in case any other party signed the discharged agreement. Further section 131(2 of the Act states that promoter needs to pay that amount of damages which is equal to the amount in case organization approved the contract but fails to complete its responsibilities.

Test is introduced by this section, as this test imposes liability of damages on the individual who sign the contract on the basis of the organization or acted on behalf of the company. This can be understood with the case law Bay v Illawarra Stationary Supplies Pty. Ltd (1986), in which Court stated that all the advocates of the organization sign the contract on the basis of the organization and as company was not formed at that time because of which organization fails to ratify the contract. In this case, Illawarra supplier’s files suit against all the advocates. Court further stated that only one advocate who sign the contract was accountable to pay the damages because he only signs the contract and no other ones.

It must be noted that, after registration organization becomes the separate legal entity and any contract signed by the organization only bounds the organization and not any other person.

Application

In the present case, Steve act as the promoter of the company and on 6^th July he signed contract with the Thor Mining Machinery Ltd for purchasing the drill machine, as this contract can be  considered as the pre-registration contract because this contract is signed by the Steve before the registration of the company. Steve contracted with the Thor for purchasing the drill for $125000.

WA Gold Exploration Ltd registered on the 10^th July with the ASIC, and in this Steve holds the 90% shareholding. Board of the WA gold fails to rectify the contract signed by the Steve before the registration of the company. Section 131 of the Act states that in case any individual sign the contract on the basis of the organization which is not yet registered, then organization becomes liable in the contract and gets its benefit if such contract is approved by the company within reasonable time period or time period agreed between the parties.

As WA Gold fails to rectify the contract because of which Steve is held liable as the promoter of the company towards the Thor Mining Machinery. provisions of this case is similar to the case law Kelner v Baxter (1866) LR 2 CP 174, as in this case advocate of the organization enter into contract with the third arty on behalf of the company were held liable on personal liable. As WA fails to rectify the contract because of which regulations of section 131 will applied, and Steve will be personally held liable towards the Thor Mining Machinery Ltd.

Clause 2 of this section states that any individual wants to sign the contract on the basis of the organization is accountable to pay amount to the third party if company is not registered or fails to rectify the contract within the time agreed between the parties at the time of signing the contract or within the reasonable time period. Therefore, amount required to be paid by the Steve is equal to the amount paid by the company in case company ratified the contract and fails to perform it.

However, Steve is not liable for the contract signed by the WA with the Volvo Trucks (Australia) Ltd for purchasing the truck, as this contract is signed after the registration of the company. After registration organization is separate legal entity, and because of which Steve is not liable towards the Volvo Trucks (Australia) Ltd.

Conclusion

Steve is personally liable towards the Thor Mining Machinery Ltd but not towards the Volvo Trucks (Australia) Ltd.

Answer 2

Issue

Whether computer solutions and other partners of the firm are liable towards Sunstar Computer Hardware Ltd and You Beaut Ute Ltd?

Law

Section 5 of partnership Act 1892 defines the provisions related to the power of the partners to bind the firm.   Each partner of the firm is considered as the agent of the firm and also of the other partners of the firm in context of the partnership business.

This section further states that, in case any partner of the firm conduct any action in terms of ordinary course of the business of the partnership not only binds the firm but also bind the other partners of the partnership. However, partners are not able to bind the firm and other partners in case partner act without authority in any specific matter or third party knows that partner does not hold the authority to act. 

Section 6 of partnership Act 1892 defines the provisions related to the liability of the partner to act on the basis of the firm. As per this section any Act or instrument related to the firms business which is not the incorporated limited partnership or executed on the name of the firm, and such instrument clearly reflects the intention of the parties to bind the firm by any person who is authorized in this context, then such agreement is binding on all the partners of the firm and the firm also. 

If partners carry out any transaction in the ordinary course of business of the firm with the third party, then such transaction bind all the partners of the firm. It is necessary to understand those situations in which partners do not hold the authority to take action in any specific matter. These situations occurred when authority of the partner has been restricted by other partners of the firm by including the express limitation in the agreement of partnership.

In case partner of the firm conduct any action in the ordinary course of business of the firm, and such action is conducted by the partner in the excess of authority then also firm and other partners of the firm are liable towards the third party if following conditions are satisfied-

• Third party did not know about the limitation of the authority imposed on the partner.
• Third party must know or believe that the partner conducted the transaction was the partner of the firm (Bruce legal, n.d..

Any express limitation imposed by agreement on the authority of the partner will not protect the firm from being liable in case partner of the breach the partnership agreement and conduct transaction in excess of their authority. However, such case gives right to the other partners of the firm against the partners who breach the provisions of the agreement.

In case law Mann v Darcy [1968] 2 AllER 172: V & L, 20.53, D1 was the only active partner among the three partners in the business of the partnership which operated as the produce merchants. D1 is responsible to manage the business, and he requested the Mann to enter into the joint account for purchasing and reselling the potatoes. Both agreed to share the profits and losses occurred from the business.

The main question before the Court in this case is whether D1 quandary the firm and other partners of the firm under section 5 of the partnership Act. The main difficulty arises when the D1contracted with the Mann instead of the subject matter of contract that was potatoes. This proposition was supported by the judge of the court by stating that partners do not hold the authority to make the co-partners liable in context of another business of the firm.

Application

In the present case, Simon, George, Sara and Mary enter into the partnership agreement with the name computer solutions. Partnership agreement impose restriction on all the partners of the firm by stating that partners can only enter into the contract of up to $ 10 000, and any contract which valued more than $10000 will be approved by all the partners. George entered into the transaction without informing the other partners of the firm with the Sunstar Computer Hardware Ltd for purchasing 50TB hard-drive for $15000. George also entered into contract with the You Beaut Ute Ltd for purchasing second-hand ute for $9000.

In both the cases, George act in excess of his authority. In case partner of the firm conduct any action in the ordinary course of business of the firm, and such action is conducted by the partner in the excess of authority then also firm and other partners of the firm are liable towards the third party if following conditions are satisfied-

• Third party did not know about the limitation of the authority imposed on the partner.
• Third party must know or believe that the partner conducted the transaction was the partner of the firm.

Any express limitation imposed by agreement on the authority of the partner will not protect the firm from being liable in case partner of the breach the partnership agreement and conduct transaction in excess of their authority. However, in this other partners of the firm get right against the partners who breach the provisions of the agreement.

Conclusion

In this case computer solutions and all the partners of the firm are liable towards both Sunstar Computer Hardware and You Beaut Ute Ltd.

References

Corporation Act 2001- Section 131

Corporation Act 2001- Section 132

Corporation Act 2001- Section 133

Bay v Illawarra Stationary Supplies Pty. Ltd (1986)

Commonwealth Bank of Australia v Australian Solar information Pty. Ltd. (1987) 5 ACLC 124.

Kelner v Baxter (1866) LR 2 CP 174

Partnership Act 1892 – Section 5

Partnership Act 1892- Section 6

Mann v Darcy [1968] 2 AllER 172: V & L, 20.53

Bruce legal, Business partnerships and third party liabilities.