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Requirement
This assignment requires you to answer two problem-type questions using the ILAC (Issues, Law, Application, Conclusion) format, a worked example of which is in the Resources folder.
Question 1
Executive Car Fleets Ltd sells cars. It employs Dan Richardson as its Vehicle Sales Manager. One of the major customers of Executive Car Fleets is Speedy Auto Hire Ltd. Richardson has often signed contracts on behalf of Executive Car Fleets Ltd with Mark Fraser, Vehicle Purchasing Manager of Speedy Auto Hire Ltd. Richardson has been negotiating with Fraser to sell 30 Mercedes Benz 450SE sedens to Speedy Auto Hire Ltd.
One Thursday at about 9.00 am Richardson sends an email to Fraser which says “My supervisor has approved the price of $ 50 000 per car. Come to my office at 4 pm this afternoon to sign the contract.†At 1.30 pm, Richardson sees Mary Jones, a University friend of his, who now works at Speedy Auto Hire Ltd as its Company Secretary. She says “I have had such a tense morning. Mark was in tears - apparently our Managing Director has asked to see him because of his bad performance this year - I think he will be firedâ€.
Back at his office, Richardson tells Johnson, Chief Financial Officer of Executive Car Fleets Ltd, about the conversation he (Richardson) had with Mary Jones, saying "I really think there is a problem here, I think Fraser may have been fired". Johnson gets angry and says "Look, we're getting a good deal, don't worry about what is going on at Speedy Auto Hire".
At 4 pm Fraser arrives at Richardson's office and signs the deal to buy the vehicles for a total price of $ 1 500 000. The next morning he gets an phone call from the Managing Director of Speedy Auto Hire Ltd who says "We aren't buying those cars you were negotiating with Fraser about". When Richardson tells him that Fraser had signed the contract at 4 pm the day before, the MD of Speedy Auto Hire responds "Tough luck, we fired him at 2 pm yesterday, so he did not have authority to buy the cars". Assume that all the above facts come out in evidence in court. Advise whether Executive Car Fleets Ltd will succeed in a legal action to enforce the contract, citing statutory and case law authority.
Question 2
Peter Jones runs a stationery business. He is also a 5% shareholder in a separate business, Sparkles Ltd, which is a company that makes and sells custom jewellery. The constitution of Sparkles Ltd says that Peter will be given a 3-year contract to supply stationery to Sparkles Ltd. He has heard that the company has decided to source all its stationery requirements from Office Pax Ltd.
Peter has also learned that Roger Rogerson, one of the directors and CEO of Sparkles Ltd, who also owns 65% of the shares in the company, entered into a contract on behalf of the company under which the company sold a rare sapphire to his nephew for $ 5 000, whereas in fact the stone is worth $ 100 000. Peter has also learned that Rogerson is about to sell a ruby worth $ 40 000 to his (Rogerson's) niece for $ 8 000, but has not yet done so.
Peter wrote a letter to the board complaining about the company's decision to source stationery from Office Pax Ltd and about the two deals. The Company Secretary wrote back saying that the Board was firm in its decision not to source stationery from Peter and that it would be taking no action against Roger in relation to his dealings with his nephew and niece.
Advise Peter on what he should do, citing relevant law. For the purposes of this question you may assume and therefore do not need to demonstrate that selling an asset at gross under-value amounts to a breach of directors' duties contained in s 180(1) and s 181 of the Corporations Act 2001 (Cth).
Solution
Issue
There are a number of issues that arise here.
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a) `The contract was to be signed at 4 pm between Richardson and Fraser based on the offer made by Executive Car Fleets Ltd.
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b) The moment Richardson met with Mary Jones, he came to know through her that it was highly likely that Fraser was going to be fired by their Managing Director.
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c) At 4 pm the deal was done between the two despite what had happened earlier. However.
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d) The next day the very same deal was cancelled by the Managing Director of Speedy Auto Hires saying that he had fired Mark Fraser at 2 pm, that is, two hours before the deal took place.
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Law
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a) As per the Australian Contract Laws, the essential ingredients of the contract were present there because a contract is more than an agreement between two parties . It had offer and acceptance as well as the intention to make a legally binding agreement. Therefore, on that count, the offer is completely valid between the two parties as long as the proper understanding and consent was involved.
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b) Richardson was in doubt because he was told by Mary Jones that the MD wants to see Richardson probably to fire him because of his poor performance. The contract has not yet signed between the two companies, so they need to remove the doubts if any. As we know that the contracts become valid when acceptance is given along with the other party giving statements to the offer it gets. So, it must be unequivocal as well as communicated to the offer, otherwise, the law would never deem a party to have accepted the offer just because it has not straight away rejected the offer
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c) When the deal was signed between Richardson and Fraser, here we have two possibilities – either Fraser did not know that he was fired or he was deliberately doing that so that his company will incur loss. In any case, if he had been given authority to make the deal.
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d) When the MD of Speedy Auto Hires called Richardson to inform him about the cancellation of the deal then there is a clear case of miscommunication between the parties. Therefore, as per the sections 18 and 41 of Competition and Consumer Act 2010 (Commonwealth) and Australian Consumer Law, the invitations or offers for the purpose of sale and purchase cannot and should not be misleading or deceptive.
Application
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a) As is clear by the contract law , that the offer for the contract to purchase 30 Mercedes Benz is valid. Because the required components of the valid offer definitely seem to be genuine and there is a presence of the intent to the contract. The offer on the part of Executive Car Fleets Ltd has been communicated with terms and conditions. In the case of valid offers, there can be different forms of intents involving the course of conduct by stating explicitly. While communicating the offer in writing, the offer must contain specific terms like price, manner of acceptance and timing. So, all of these elements were discussed between Richardson and Fraser making it a valid offer for the contract.
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b) When Richardson came to know that something is brewing in Speedy Auto Hires and then there was an element of doubt on his part, yet he proceeded with the contract that was going to be signed between the two. At this point, the provision of negligent misrepresentation arises wherein any party to the contract is under a special duty of care to the other party. As the circumstances were such that it was reasonable to rely on the statement made by Mary Jones and it was less likely that her statement would be false. Therefore, Richardson would have taken the special care in this case. He should have spoken to the ‘buyer company’ as to whether the information was correct or not. Moreover, when Richardson informed his Chief Financial Officer about these developments, he strictly ordered him to go ahead with the possible contract. So, as per Australian Contract Law, here, the course of action has been affected by the undue influence. The undue influence is carried out by taking unfair or improper advantage created by the weakness of the other party.
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c) When the contract was signed between Richardson and Fraser then it was done on the basis of the mutual agreement between the two on behalf of their companies. However, when the contract was signed, Fraser was apparently fired by his MD at 2 pm precisely, while the deal took place at 4 pm. But the two conditions that emerge at this point as mentioned earlier were either Fraser knew that he had been fired and deliberately doing this to bring harm to his company or he did not know about it at all. Since, the communication of the firing of Fraser from Speedy Auto Hires was not mentioned in the scenario, so, it is safe to assume for us that Fraser did not know anything about his firing. Therefore, in such a situation, the contract will be valid.
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d) Now when the deal was cancelled by the managing director of Speedy Auto Hires, the contract had been signed till then but just before that MD had fired Fraser. So, technically, before signing the contract, Fraser was rendered no authority to sign it on behalf of Executive Car Fleets Ltd. However, there should have been a proper communication made just after firing him by the MD. In any case, the contract became void.
Conclusion
As per the provisions of the above laws, it can be concluded that the contract is valid and Executive Car Fleets Ltd will succeed in a legal action to enforce the contract, citing statutory and case law authority.
Solution
Issue
The issues that come forth in this scenario are as follows:
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1. The breach of written constitution of the company (Sparkles Ltd.).
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2. Breach of director’s duties and responsibilities as Roger Rogerson sold a rare sapphire for $5,000 whose real worth was $100,000 and is about to sell a ruby for $8,000 whose real worth is $40,000.
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3. Breach of duties and responsibilities of Board of Directors as they are expected to be fair, transparent and accountable, but they did not pay heed to Peter’s complaints.
Law
1. As according to the constitution of Sparkles Ltd, Peter will be given a three year contract to supply stationery to it, but apparently the company had decided to do the business with Office Pax Ltd – a third company. We know that the company constitutions are a set of rules and guidelines with which any company operates. As per the Corporation Act 2001 , the courts have primarily assessed actions that could be termed as the breach of constitution of the company. That is, a variation of actions without the adherence to the constitutional provision that need consent from the affected party so that the result of the variance is rendered invalid or no effect. Also, the constitution can be changed by passing a special resolution with the help of voting on the part of shareholders.
2. Section 198A (1) of The Corporations Act 2001 states that any company’s business is managed by the directors with the help of certain legal duties and responsibilities. The Corporations Act, 2001lays down the four basic duties of the director:
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i. Care and diligence: The section 180 states that a fair degree of care and diligence shall be used, it is also imposed on the director as per the common law.
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ii. Good faith: It is always in the best interest of the company if the director acts in good faith. It also includes the duty of fidelity and trust.
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iii. Improper use of position: According to Section 182, the directors are not supposed to use their position to gain advantage for themselves or someone else for that matter.
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iv. Improper use of information: According to Section 183, the directors are not supposed to use the information that is confidential in order to gain advantage for themselves or someone else.
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v. Insolvency: It is very critical that the director should stay from any trade when there is insolvency in the company.
3. As per the Corporation Act, 2001, the Board of directors of a company are charged with the responsibility of providing good corporate governance. These responsibilities are characterized by important policy and performance. They are supposed to maintain fairness, transparency, accountability and avoidance of the conflicts of interest.
Application
1. According to the facts of the case and as per the Corporations Act, 2001 , there is a clear breach of company constitution because Peter got to know that the company Sparkles Ltd has changed its client and started dealing with another company to source its stationery requirements. As per the law, the company should have informed Peter about the step that they are going to take in relation to change their business dealings. Under Section 125(2) of the act, the company’s constitution restricts its activities in which it is engaged. If such was the case, Sparkle Ltd should have taken the necessary steps to modify and repeal the provisions of its constitution by passing a special resolution wherein it had to give 21 days-notice along with an agreement of 75% of majority of votes cast.
2. The Director and CEO, Roger Rogerson has clearly violated the duties and responsibilities of a director because the kind of transaction that took place with regards to the sale of the rare stone. As per the law, it is very important that while running a company, the director should be aware of his financial duties regarding the commercial health and economic well-being of the company rather than protecting any individual. In the present scenario, Rogerson directly benefited his nephew by selling the rare sapphire in a price which was way below its actual worth, thereby jeopardizing the company’s financial gains. Therefore, under section 1317G, fines and penalties may be imposed on the director on account of the breach of his duties and responsibilities. Rogerson is also liable to compensate for the loss the company suffered. In rare circumstances, he can also be disqualified from holding the office on account of a serious breach such as acting dishonestly or fraudulently. So, as per the law, the possible fine that can be imposed in such a situation is up to $200,000 or imprisonment of up to 5 years or disqualification from the position of director.
3. The primary role of the board of directors of any company is to safeguard the interests of investors and all other stakeholders. In order to perform this responsibility, the board is needed to become active, informed and competent to efficiently supervise the company. It is also responsible to appoint chief executive and suspend him as well. So, in the present scenario, when it was brought to the notice of the board by Peter about the misdeeds of Rogerson regarding the deal, the board of directors should have taken the cognizance of the facts of the letter. An internal investigation was the pertinent step that was needed to have taken by them because it would have been in the best interest of the company. So, this step would have served the purpose of upholding the interests of its investors, customers, shareholders and all the other stakeholders.
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So, on the basis of the above analysis of the scenario and finding out different provisions related to the different issues that were emerged in the case, Peter should seek professional legal help under the Sections 198A (1), 180, 182, 183,125(2) and 1317G of Corporations Act, 2001 (Commonwealth).
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