Principles of Corporations Law - Case Study Example

Business Law Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Lecture Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 14th September 2012 Introduction Corporation are considered separate entities in law from the people who own or direct them. The law recognizes a company as a fictitious individual who has the same legal rights as an ordinary citizen. In terms of contract law this means that corporations have the legal capacity to enter into contracts with individuals and other companies. However, since companies are an abstraction they can only deal with other parties contractually through people. Thus any contract that is binding to the contract is signed and approved by agents or officers of the company. In law this relationship is referred to as the Principal-agent relationship; the principal is the company while the agent is the person who act on behalf of the company. In some cases companies have refused to recognise the validity of contract signed by their agents arguing they do not have the legal capacity to enter contracts on behalf of the company. This repudiation of responsibility has caused losses to employees or companies, and individuals dealing with companies and other corporation that find themselves in this situation. In the present case the Salesman and Fred find themselves in a similar situation where the Salesman may lose out on the cost of installing cabling in Fred’s organization and his commission. Fred too is also in danger of having his wages deducted for entering into a contract which the company views as invalid. This paper analyzes the case study and then proceeds to explore the articulation of statutes on the issues. Secondly it applies the law to the issues found in the cases study and finally offers a conclusion based on application of the law of contract. Issues To identify the issue of law in the cases the relevant facts are set out as below: Fred was an assistant manager of a regional branch of a large organization. The office has a large waiting area for clients. Fred is left in-charge for a week by his manager. The manager cautions Fred to leave things as they are. A cable TV salesman offers Fred an irresistible deal that has to be signed by the end of the week. Fred seeing the need for Cable TV in the waiting area agrees to the deal. Cabling is installed and the service starts running before the manager returns. When the manager return he orders for the cancellation of the deal and the removal of all cabling The salesman asks for an early termination charge if the contract is cancelled. The manager asserts if any termination charge is to be paid it should come from Fred’s pocket. Fred appeals to the head office. From the facts listed above four legal issues are found to be the focal points of the scenario. First, it is evident the manager contests the validity of the contract between Fred and the salesman and especially Fred’s capacity to enter into the contract on behalf of the Company. Secondly, if the contract is valid can it be avoided by the company? Thirdly, Fred contests any rebate of his wages as compensation for the losses suffered by the company. Finally, that the manager is liable for the loss suffered by the company as he had not delegated his powers properly to Fred. Issue 1: validity of the contract Principles/Law For a contract to be considered Valid all the elements of a contract must be present. These elements are: intent to form legal relationship, Agreement consisting of offer and acceptance, consideration where both parties benefit, legal capacity to enter into contract and finally consent; both parties have to be willing participants1. Application In the case the contract between the Salesman and Fred had each of these five elements but it can be urged Fred lacked the legal authority to act on behalf of the company. Statutory law in the corporation Act section 124 gives the same legal capacity to companies as it gives to individuals2. Both Section 124 and 125 states the company cannot invalidate its capacity to enter a contract if its interest is not served by the contract or is prohibited by its constitution3. Section126 expressly allows agents to act on behalf of the company in contract formation even without the use of a common seal4. On dealings with companies outsiders are allowed by Section 128 to make assumption about a company’s legal capacity5. The assumption are set out in Section 129, subsection 3 allows a person dealing with a company to assume any officer or agent held out by a company has been duly appointed and has all the powers that comes with an equal position in another organization6. The Law It is evident that the organization that has employed Fred has the capacity to enter into a contract with the salesman’s. Fred’s capacity to act on behalf of the company is questionable but can be answered by applying section 126 of the corporation act 2001 which allows Fred to enter into contract as an agent of the company. The salesman can rely on the assumption in section 129 where he assumes that Tom having being held out as the person in-charge of the companies regional office had the powers to enter into a contract as an agent of the company. He can also rely on the indoor management rule set out in Royal British Bank v Turquand' (1856) 6 E&B 327 which entitles him to deal without needing to know about its internal chain of command7. From the salesman perspective his contract was within the four conditions set out in Freeman and Lockyer v Buckhurst Properties (Mangal) Ltd [1964] 2 QB 4808 for contract to be binding to a company These conditions are: a). The agent must have been held out to the outside world as having the authority to enter into contract on behalf of the company, b). Representation must have been made by a person with actual authority as regards the matter of the contract, c). The insider must rely on the holding out to enter into the contract d).The company constitution does not prohibit the company the capacity to enter into that type of contract or the power to delegate that capacity9. Under the Corporation Act 2001 the last two of these conditions do not have to be met10. The contracts between Fred and the Salesman met the first two conditions as by leaving Fred in-charge of the regional office and under assumption in Section 129 Fred the company held out Fred as having the authority to act on the contrary11. Issue: If the contract is valid can it be avoided by the company? The law Section 124 allows people to recover debts owed by the company even where the interests of the company are not served12. Section 125 of the corporation act 2001 asserts the exercise of legal capacity by a company is cannot be invalidated because it is prohibited by the company’s constitution13. Application The company cannot avoid the contract with the salesman entered on its behalf by Fred. Under Section 124 even if the exercise of power goes against the interests of the company the company cannot cite this as an exit to the contract14. Secondly, even if the company constitution may have prohibited Fred from entering into a contract on behalf of the company according to section 125 the company would not be able to invalidate the contract and therefore it would be liable to pay the termination cost. Issue 3: Fred contest that he is not liable for the loss he incurred while acting on behalf of the company. Law The corporation Act in section 181 finds employees of a company who do not act in good faith while exercising powers on behalf of the company liable for a civil or criminal offence15. Section 182 however limits this liability to occasions where the officer seeks to advantage themselves or cause detriment to the organization16. Application Although the organization may accuse Fred of surpassing his authority in entering into contract with the salesman his acts show he acted in good faith. By approving the provision of cable TV service for the waiting area of the corporation Fred did not mean to cause detriment to the organization17. Although Fred had been told to keep things normal by his manager his action shows that he had the best interest of his organization at heart. Issue 4: Is the manager Liable for the loss that may be suffered by the company arising in the contract A person who delegates responsibility in a company may be found liable for the actions of the person he has delegated authority to. The law Section 198D of the Corporation Act allows directors of corporations to delegate the powers of the company to employees of the firm who can also delegate this authority to other employees18. However, according to section 190 a person who delegates authority must take due care to make sure that the exercise of such powers does not make them liable for losses to the co-corporation19. Application From the case study Fred’s manager when he left for the holiday delegated his authority to Fred under the powers granted by Section 198D of the Corporation Act20. Section 190 controls the delegation of power and requires employees who delegate powers to others to act cautiously lest the power so delegated is misused. The conditions that a person who is delegating powers has to meet under Section 190 are; a). The exercise of power is within the powers of the delegating employee under the company’s constitution and the Corporation Act 2001, b). If the director believed the delegation was; 1. On reasonable grounds, 2. In good faith; and, 3. On inquiry he found out that the delegate was reliable as to be expected to use the powers responsibly21. Fred’s manager when left Fred in charge of the office knew that Fred was capable of running the affairs of the regional office as he had been appointed assistant manager by the corporation. Therefore all the conditions set out in Section 190 were met and therefore Fred’s manager cannot be held accountable for losses arising from Fred’s exercise of the power he had delegated to him. Conclusion The contract between the Salesman and Fred in the case cannot be considered invalid or void as the Company cannot cite that its interests are were not served to escape the contract’s obligations. Even if the company asserted it had not authorised Fred to act on its behalf the Salesman can cite the indoor management rule which allows him to deals with an agent of the company if he can reasonably believe he has the authority to transact business on behalf of the company. Therefore, the question of the legal capacity of Fred to enter into the contract is answered affirmatively and therefore the contract is binding to the company. Secondly, the company cannot avoid the contract as none of the exit clauses of the contract are accessible and the corporation act prohibits it from invalidating Fred exercise of its power in section 125. The Corporation Act 2001 (cth) protects employees who act beyond their authority while representing companies. Fred is able to rely on section 182 to escape liability for the early termination of the contract as he was acting in good faith and did not mean to cause detriment to the company. This is unfortunate as it denies companies the ability to discipline staff who act beyond their powers and cause the company harm. Fred’s manager is also exempted from liability as he had taken all the necessary precautions in delegating powers to Fred. In summary it is important for organization to be careful while transacting business with outsiders as a company may find itself bound to a contract it had no intention of making. Delegation of authority must also be cautious as the company may find it is unable to recover losses as in the case discussed above. In the case it is possible for both Fred and his manager to escape liability over the termination charge for the contact. Bibliography Articles/Books/ Reports Ford H.A.J., RP Austin, R. P and Ramsay, I.M, Ford’s Principles of Corporations Law (10th ed, (2001) Sydney: Butterworths. Campbell, N and Armour, J, ‘Demystifying the Civil Liability of Corporate Agents’ (2003) 62 The Cambridge Law Journal 290,303 Hobson, M, D. ‘The Law of Shadow Directorships’ (1998) 10 Bond Law Review 184, 187, Ramsay, I., Stapledon, G and Fong, K. ‘Affixing of the Company Seal and the Effect of the Statutory Assumption in the Corporations Law’ (1999) 10 Journal of Banking and Finance Law and Practice 38, 39 Others The Corporation Act 2001 (cth) Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 Royal British Bank v Turquand' (1856) 6 E&B 327 Read More