LAW6000-Business and Corporate Law Assignment

SECTION A

A1Identify 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

A2What 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.

A3A 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 partners 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 Kendras 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 ofprofessional/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 Johans loss as it was caused by Kendras 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 employers 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 Gingers letter of acceptance on Friday November 4 at 10am.

Jack and Gingerbothconsider 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 adirectorof 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.

Brians brother, Dennis, is anexecutive directorof 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 Denniss 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 thebusiness judgment rulewould 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 directors 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.