LAW6000-Business and Corporate Law Assignment

SECTION A

A1 Identify the 3 arms of the Australian government and explain how this arrangement  demonstrates the concept of the separation of powers. 

Suggested solution 

• Executive – government departments under ministers 
• Legislative - Parliament 
• Judiciary - courts 

Each arm has a particular focus which ensures no one person or body can exercise  more than one power and limits influence in the process through checks and balances 

A2 What is a restrictive covenant? What factors will the courts take into account to  determine whether a restrictive covenant is enforceable? 

Suggested solution 

A restrictive covenant is a clause in a contract designed to limit the ability of one party  to a contract to engage in employment or trade. They are designed to protect the rights  of each party and promote competition, however they will be void unless reasonable  in their restrictions.

The factors courts will consider include: 

• The geographic extent of the restriction 
• The time period involved 
• The relative bargaining strengths 
• The type of business and/or activity involved. 

A3 A partner in a partnership has joint and several liability. Explain what is meant by joint  and several liability in terms of individual partner liability  

Suggested solution 

Joint and several liability essentially means each partner is liable for the debts of the  partnership. As a result actions usually proceed against the firm with the judgment  binding all partners.  

In addition a partner’s personal assets are at risk if there is insufficient assets in the  partnership to cover the debts. This is generally so even if the partner did not actually  make the decision resulting in the action. The partners may also be required to make  up the difference if one partner has insufficient assets to meet their share. 

Question B1 Professional Negligence

Kendra is a financial advisor employed by Goldenfuture Pty Ltd. Johan has recently  inherited a sum of money which he wishes to safely invest. Johan has become a client  of Goldenfuture and Kendra has been appointed as his advisor.  

Johan clearly instructs Kendra to make low risk, long term gain investments, and not  to make any high risk investments. Kendra advised Johan to invest in Rocksteady Ltd. Kendra reassures Johan by stating Rocksteady Ltd has a long history of stability  and conservative growth and is a safe investment. Johan accepts Kendra’s advice and invests all his inheritance with Rocksteady Ltd. 

Six months later, Johan is informed Rocksteady Ltd has failed and gone into liquidation  and he has lost his entire investment. On making enquires, Johan discovers Kendra had used old, out of date and incorrect information as her basis for advising Johan to  invest in Rocksteady Ltd.  

Required 

With reference to relevant legal principles use the IRAC legal problem solving  approach to determine whether Johan can: 

1. sue Kendra for professional negligence 
2. sue Goldenfuture Pty Ltd for negligence 

Ensure you support your conclusion with relevant case law and/or legislation Suggested solution 

Tort: Negligence (Duty of care) suing Kendra 

Issue: Has Kendra been negligent in the financial advice provided to Johan? 

Rule: 

The law imposes a duty on a person to act with care towards others. You must take  reasonable care to avoid acts and omissions which you can reasonably foresee would  be likely to injure your neighbour.( Donohue v Stevenson

Such duty exists where one party knows or reasonably should know that their conduct  could harm an individual or class of people and that person cannot protect themselves.  In this case we are concerned with negligent misstatement where a provider of professional/expert advice owes duty to consumer of that advice 

The standard of care expected of persons professing a particular skill. The standard  required is that reasonably expected of a person professing that skill in the  circumstances at that time as judged by the profession.

The severity of possible harm should a breach occur must be considered and the  required standard of care increases as the level of potential harm increases. 

Application 

Kendra has failed in the standard of care expected of the profession by providing  advice based on out of date and incorrect advice. Therefore there is breach of the  duty of care owed to Johan.

It is also clear the damages, i.e. loss of the investment, have flowed from the breach of  the duty of care.

Conclusion 

Therefore it is likely Johan should succeed in in an action for the tort of negligence in  terms of the investment advice. 

However, he is unlikely to be successful in suing Kendra as she is an employee and  so the employer will be initially liable under the doctrine of vicarious liability.

Tort: Negligence (Duty of care) suing Goldenfuture 

Vicarious liability 

Issue 

Is Goldenfuture vicariously liable for Johan’s loss as it was caused by Kendra’s  negligent financial advice?

Rule 

Employers will be vicariously liable for any negligent acts carried out by employees in  the course of their employment duties. Cassidy v Ministry of Health 

Application 

Kendra is acting in the course of her employment duties as Goldenfuture is evidently  investment advisors. Providing investment advice is therefore consistent with duties  as a financial advisor and furthering the employer’s interests. As she breached the  duty of care expected and the loss flowed from the breach Goldenfuture is liable

Conclusion 

Johan would likely succeed in suing Goldenfuture as they are vicariously liable for  actions of negligent employees 

Question B2 Contract formation 

Robert runs a record shop which he has decided to sell. Robert posted two separate  letters of offer to Jack and Ginger. Each letter contained a detailed offer to sell the  business for a single sum of $500,000. Jack received his letter of offer on Tuesday  November 1, whilst Ginger did not receive his letter until Thursday November 3 as he  was interstate.  

Ginger prepared a written acceptance of the offer on the proviso the payment could be made in two separate payments of $250 000 made six months apart and posted it  at 2.35pm on Thursday November 3. The letter was stamped at the post office. 

Jack met with Robert face to face at 3pm on Thursday November 3 and signed a  written agreement to purchase the business for $500,000 on the exact terms offered.  

Robert received Ginger’s letter of acceptance on Friday November 4 at 10am. 

Jack and Ginger both consider they have a contract with Robert to purchase the  business.  

Required 

With reference to relevant legal principles use the IRAC legal problem solving  approach to: 

1. analyse each of the claims to a valid contract made by Jack and Ginger 
2. advise Robert about who has the valid contract 

Suggested solution 

Jack 

Offer Received: Nov 1 

Offer Accepted: 3 pm Nov 3 face to face written acceptance 

Ginger 

Offer Received: November 3 

Offer Accepted: 2.35pm November 3 by post variation on the terms, therefore not  acceptance

Issue 

Is there a contract between Robert and Jack and if so when is it formed?

Rule 

Offer must be a valid offer, it is firm, indicate a willingness to be bound and be communicated 

Acceptance must be unconditional on the terms of the offer 

Acceptance was in reliance on the offer 

Acceptance must be communicated to the offeror 

Application 

On the facts Jack has accepted the offer and signed a contract indicating his intention to be  bound in legal relations at the meeting on November 3 presumably at or around 3pm. Jack  has accepted the payment conditions and communicated unconditional acceptance to Robert  

Conclusion 

There is a valid contract between Robert and Jack formed at 3 pm 3 November 

Issue 

Is there a contract between Robert and Ginger and if so when is it formed? 

Rule 

Offer must be a valid offer, it is firm, indicate a willingness to be bound and be communicated  Acceptance must be unconditional on the terms of the offer 

Counter offer destroys an offer 

Application 

On the facts Ginger has not accepted the offer as the letter contains a variation on the terms  and therefore is a counter offer and not an acceptance 

Conclusion 

There is no valid contract between Robert and Ginger, the date and time on the letter are  irrelevant as the letter is a counter offer not an acceptance.

Question C1 Corporations Law 

Brian is a director of Graball Ltd. Graball Ltd wants to grow its business and wishes  to take over another successful company, Hubris Ltd. This is discussed at a Graball  Ltd board meeting and it is decided to attempt the takeover in three months.  

Brian’s brother, Dennis, is an executive director of Hubris Ltd. However, Brian does  not disclose this fact to the board of Graball Ltd. Brian informs Dennis of the intended  takeover and also buys 100,000 shares in Hubris Ltd at $30 a share. Dennis also  increases his own shareholding in Hubris Ltd. However, prior to the takeover Dennis  resigns as an executive director of Hubris Ltd to set up his own business.  

Dennis takes with him a new and valuable investment security pricing system he  developed and used while working as an executive director of Hubris Ltd and uses it  in his own business. 

Graball Ltd proceeds with the takeover, and the share price of Hubris Ltd increases to  $150 a share. Brian and Dennis sell their shares directly after the take over and make  a large profit.  

Graball Ltd and Hubris Ltd become suspicious and following investigation discover  Brian and Dennis’s conduct and contact you for advice as to what action they can take  against Brian and Dennis. 

Required 

With reference to the relevant sections of the Corporations Act and case law, use the  IRAC legal problem solving approach to determine: 

1. whether Brian and Dennis have properly fulfilled their duties as directors? If  not, what duties have they breached and why?
2. whether the ‘business judgment rule’ would be useful to either Brian or  Dennis in these circumstances? Explain your answer. 

Issue 

Have Dennis and Brian complied properly with their obligations under the director’s  duties? 

Rule 

Executive director – a director who is also an employee of the company and who  carries out the day-to-day management delegated to him/ her by the board. 

Director – a director who is not involved in the day-to-day management of the  company but who has a supervisory, monitoring and advisory role.

There is no distinction made between executive directors and directors and their  duties and obligations by the Corporations Act 2001 

They have a duty to: 

Act in good faith – act for the benefit of the company as a whole s181 Corp Act

Not use make improper use of company information s183 Corp Act- as fiduciary  agents they cannot use their powers to gain private advantage

Not make improper use of their position as directors s182 Corp Act 

Disclose personal interests in any matter the company may become involved in  ss191 -194 

Application  

Both of them failed to disclose their sibling relationship and the roles they have in the  respective companies which enabled them to gain insight into the takeover. They  have both misused company information regarding the takeover to make personal  gains from the increase in share price 

Conclusion  

Brian and Dennis have clearly breached their duties as directors by not disclosing  their relationship which has created a clear conflict of interest, and both have clearly  misused their positions to make a personal gain through the misuse of company  information.

Brian and Dennis have breached the relevant sections of the Corporations Act and  remedies include return of profit, account of profit, damages or compensation and  possible criminal penalties for breaching s181, 182 and 183. 

Business Judgment rule 

Issue 

Is the business judgment rule applicable? 

Rule 

S180(1) imposes an obligation on directors to exercise care and diligence in decision  making activities.

This occurs when the director has: 

Made a decision in good faith and proper purpose and 

Does not have a material personal interest in the subject matter of the decision and 

Informs themselves about the subject and 

Rationally believe the decision is in the best interests 

Application 

As Brian and Dennis clearly have a material personal interest in the matter due to the  profit from the share price increase, the requirements of the rule are not met.

Conclusion 

The business judgement rule will not be useful to either Brian or Dennis.