HI6027 - Business and Corporate Law Assessment

Part A: Contracts Law Questions – choose one only

Option 1

SOO Burgers is a chain of hamburger restaurants operating in Australia and New Zealand. Sales across the restaurant chain were slow in the last financial year. In order to sell more hamburgers, SOO Burgers ran a competition Australia-wide, which was extensively promoted on radio, newspapers and online. The promotion is called “the Fair Dinkum deal”. According to promotion rules, a token would be attached to the wrapper of every “Double Decker Emu Burger”. If a customer collects 50 of these tokens, they could be redeemed at the counter for a golden scratch ticket. The promotion rules also stated:

“Fair dinkum! Scratch the golden ticket. If it reveals a golden car, present your ticket to the SOO Burgers head office and win the grand prize of a brand new Mazda CX-9.

Hurry! This promotion doesn’t last forever!”

Michael “Mickey” Morrow was extremely keen to join the promotion and win the car. It also helped that he loves SOO Burgers, particularly the Double Decker Emu Burger. The very next morning after he heard the promotion announced on radio, he rushed to his favourite SOO Burgers branch in Fitzroy. He ordered 50 Double Decker Emu Burgers. Mickey was a man on a mission, and he ate as he had never done before in his life. He passed out from exhaustion and had to be rushed to the emergency room of his local hospital to get his stomach pumped. Luckily though, before passing out, he made sure to redeem his 50 tokens at the counter for a golden scratch ticket.

As would be expected, not all customers were thrilled about going to SOO Burgers and buying a Double Decker Emu Burger just for the chance to win a car. Consequently, many burger wrappers that contained tokens were thrown away in the rubbish bins. Brett Vulture scavenged through the rubbish bins of the SOO Burgers branch at Altona. To collect the discarded wrappers for their tokens. He quickly collected 100 tokens. He went inside the restaurant and redeemed the tokens for two golden scratch tickets. He was ecstatic when he scratched them and found, not one, but two golden cars! He then rushed to SOO Burgers head office in Melbourne, where he presented his winning tickets. The receptionist told him to wait at the reception waiting area. While waiting, an employee came from inside the office and posted a sign on the front door of the office. Curious, Brett approached the sign and read:

“SOO Burgers apologises that because of a printing error, incorrect golden scratch tickets were included in the Fair Dinkum deal. Management is sorry to advise that these faulty tickets are void and will not be honoured.

SOO Burgers thanks its customers for their patience and invite all of them to join its next exciting promotion.”

As Brett looked at the posted in dismay, he spotted another customer who emerged from office accompanied by a SOO Burgers employee. The customer was smiling from ear to ear as he shook the employee’s hand, and said, “I’m so happy to win the car!” It turned out that that customer came in before Brett and presented a winning golden scratch ticket. SOO Burgers honoured his ticket since it had already purchased the only Mazda CX-9 that it was going to give away as the big prize.

In the meantime, while Mickey was at the hospital, SOO Burgers’ announced on radio, newspapers and online that there had been a printing error in the golden scratch tickets. As a result, instead of only one winning golden scratch ticket in the promotion to win the Mazda CX-9, every one in five tickets were winning tickets! SOO Burgers announced that it was immediately declaring that their Fair Dinkum promotion was void and would not honour any prize claims. Mickey did not actually read or hear this announcement. But he overheard some nurses talking as they passed his room about SOO Burgers promotional fiasco and the cancellation of the entire promotion.

Mickey quickly found his golden ticket, scratched it and found a golden car. Thinking that he had not heard anything official from SOO Burgers itself, he discharged himself from the hospital and went straight to the company’s head office with the aim of redeeming his winning ticket. When he arrived, there was a mob of angry customers outside the notice on the front door. As the crowed covered the notice, Mickey did not read it; instead, he approached the receptionist and presented his winning ticket.

SOO Burgers now seeks your legal advice on whether they have to provide (a) Mickey and (b) Brett with the Mazda CX-9s they are claiming. Please advise on Mickey’s and Brett’s positions separately.

Option 2

Frederick Forthryrt is the author of the bestselling novel The Day of the Yokel, which was published by Metro Publishers last year. Forthryt has just completed his second book, The Fourth Pretzel.

Forthryrt does not believe that Metro treated him well, considering the success of his first book. At a party in late February, Forthryrt met Boswold, who was the chief editor at Boswold Books, and asked whether Boswold would be interested in publishing his second book.

Forthryrt said:

‘Mind you, I wouldn’t settle for anything under 40 grand.’

Boswold said he thought that was a fair price.

On 3 March, the editor at Metro Publishers telephoned Forthryt and asked whether he had competed his second book. Forthryrt answered:

‘Yes, and I’m going to sell it to the highest bidder. And I’m dead serious about that.”

The editor at Metro said his company was prepared to pay him $50,000. Forthryrt said he would ‘think about it’.

On 4 March, Forthryrt received a letter from Havoc Films in which Havoc said I would pay him $45,000 for the rights to make The Day of the Yokel into a film. That afternoon Forthryrt wrote back saying:

‘I accept your offer, but must have final say in who plays the lead role.’

On 10 March, Forthryrt received a letter from Boswold enclosing a Boswold standard form contact. In the letter, Boswold said:

‘Further to our agreement re publication of your second book The Fourth Pretzel, please find enclosed formal contract for $40,000 for your signing.’

The contract included a clause specifying the sale included ‘all rights to newspaper and/or magazine serialisation of the said book’ as a non-severable part of the package Boswold was prepared to pay for. Forthryrt did not read the clause. He telephoned Boswold and told him that Metro was willing to pay $50,000 for the book. Boswold said:

‘Well, we can go as high as $45,000.’ Thinking that Boswold Books would give him better treatment than he had received from Metro, Forthryrt substituted $45,000 for $40,000 as the sum payable under the contract and signed the contract. He then put the contract in an envelope and took the envelope to the local post office where he handed it across the counter to a postal worker he knew.

Outside the post office, Forthryrt met Pickwick, a well-established publisher who had a reputation for treating his authors well. Pickwick said he wanted to publish The Fourth Pretzel and, when Forthryrt replied that Boswold Books had said it would pay $45,000, said:

‘Oh that mob. They’re about to go belly up.’

Forthryrt immediately returned to the post office and persuaded the postal worker to give back the envelope containing the contract. Pickwick then wrote a cheque for $45,000 and he and Forthryrt shook hands on the deal.

Advise Forthryrt fully with respect to the contracts that now bind him (if any), indicating when such contracts were concluded.

Part B: Corporations Law questions – choose one only

Option 1

Sparkling Pty Ltd (Sparkling) operates three children’s clothing shops in Tasmania. On 8 August 2007, Sarah was appointed to the position of Managing Director of Sparkling for a period of two years. A return was lodged with ASIC indicating her appointment as a director on that date. Sarah was not formally reappointed after 8 August 2009, but she has continued to act as Managing Director. No return was lodged following the expiration of her period of office. The terms of Sarah’s appointment, which were set out in a contract between her and Sparkling, included a restriction to the effect that she was not to commit the company to borrowing transactions in excess of $20,000. Any such transaction was to remain subject to the approval of the board of directors.

On 20 December 2010 Sarah, purportedly acting on behalf of Sparkling, signed a log contract with Costello Bank, pursuant to which the Bank agreed to lend the company $30,000 in order to establish a eucalypt plantation. The transaction was not referred to the Board.

The Bank was not aware of either:

• the contents of Sarah’s contract; or
• the return lodged by Sparkling at the time of Sarah’s appointment.

The Board has since discovered the loan contract and has stopped all repayments on the loan. The Bank has called in the loan and is suing Sparkling for the principal together with all outstanding interest.

(a) What do you think the outcome of this case will be?

(b) What do you think the outcome of this case should be?

(c) Would the outcome of this case be different if:

(i) the loan was for refurbishment of two of Sparkling’ clothing shops; and

(ii) the bank’s loan officer knew Sarah had fallen out of favour with the Board and was negotiating a new job?

Option 2

Joytronics Pty Ltd (Joytronics) operates a retail store where it sells electronics kits, components, semiconductors, enclosures, batteries & chargers, power supplies, test equipment, tools, speakers, and car audio and stereo equipment and accessories.

Felix, Gregg and Mercedes are the only shareholders and directors. Felix reports every day to Joytronics’ main store in Sydney’s CBD and manages the company’s daily operations. Mercedes is a non-executive director and she has no active hand in managing or operating Joytronics. Gregg, who dropped out of school at a young age and did not compete his high school certificate, but who is very knowledgeable about Joytronics’ particular product range, is in charge of the company’s warehouse.

Since Joytronics opened its Sydney store seven years ago until the end of 2018, the store has done very well and consistently earned profits. Unfortunately, a rival business, Primepoint Car and Audio, opened a store down the street from Joytronics’ store. In the last six months, Joytronics’ business suffered and the store has not been as profitable as before.

Felix believes that Joytronics should move to larger store but in a different area in Sydney. Acting alone and without asking either Gregg or Mercedes, he scouts around for a new warehouse store. The first warehouse that he inspects in Parramatta greatly impresses him and he decides that that is where the story should relocate. The selling price of the warehouse though is a bit steep and is above Joytronics’ budget. Felix does not think this is an issue – after all, if it opens in that area of Parramatta, Joytronics would be the only store of its kind in the area and it will have a captured market.

Felix calls a board meeting and announces to Gregg and Mercedes that relocating from Sydney to Parramatta is the right move for the company, that this is the answer to all of the company’s problems, and that the warehouse premises he found is ideal for their needs.

Felix further tells Greg and Mercedes: “But we can’t delay because another company wants to buy this warehouse!” What Felix doesn’t tell his co-directors is that this warehouse is the only property he inspected. But Gregg and Mercedes are so caught up in Felix’s excitement that they agree to his proposal. In reality, Mercedes was unsure about moving the store in the first place and she feels that they need sufficient time to look at their other options. On the other hand, Gregg, who is ignorant about financial matters, agrees with Felix’s recommendation.

Joytronics then proceeds to buy the warehouse and sets up its business therein, opening its new Parramatta store after three months. Unfortunately, due to several factors outside the company’s control, the store does not do very well and is not profitable. Mercedes and Gregg are stressed out about their obligations as directors of Joytronics if the company’s financial situation grows steadily worse. Mercedes and Gregg come to you for legal advice.

(a) Explain to Mercedes the following:

(i) What is her legal position with regard to breaches (if any) of her general law or statutory duty of care and diligence as a director?

(ii) Was her decision to agree to the purchase of the new premises protected by s 180 (2) of the Corporations Act 2001 (Cth)?

(iii) Is she liable for breaching s 588G of the Corporations Act 2001 (Cth) if Joytronics becomes insolvent.

(b) Explain to Gregg his position in respect of any breaches of his duty of care and any possible liability for insolvent trading if Joytronics becomes insolvent.

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