Issues In Contract Law And Principles Of Agency

Validity of Contract Created by Sara as an Agent of an Undisclosed Principle with Gabby

(i) In order to deal with the above-mentioned issues, the principles of the law of agency need to be applied. For example, the first issue is related with the agent of undisclosed principle. The use of undisclosed agency agreements can be commonly found in the commercial world. For example a person has entered into a contract for leasing a motor vehicle from ABC Leasing Company and such person would ordinarily believe that he has a contract with such company. But the truth can be that the person has contracted with another company who has given authority as principal to ABC Leasing to act as its agent and enter into a contract on its behalf. Therefore in such a case, both the agent as well as the undisclosed principle are allowed by the law to sue and be sued under such a contract unless it has been expressly or implicitly mentioned in the contract that the right to sue or be sued is confined to the named parties. However there are certain anomalies present in this doctrine of undisclosed principle. The reason is that this doctrine runs parallel to the principle of privity of contract. Privity of contract is a principle of the law of contract according to which the parties to a contract are legally bound to each other only and not with third-party. However, the doctrine of undisclosed principle is justified on the grounds of commercial convenience. An example of the agents of undisclosed principle can be given regarding the stockbrokers (Whincop, 1997). In most of the cases they transact securities on behalf of the clients, but they do so in such a way that they appear to be the principals (Gelb, 1982). In a recent decision delivered in Abigroup Contractors Pty Limited v Peninsula Balmain Pty Limited (2001), the court stated that the silence of a developer regarding agency agreement that has an adverse impact on the interests of the building contractor was sent to be deceptive or misleading (Sealy and Hooley, 2009).

(ii) An agent may have the actual or the implied authority to enter into a contract on behalf of its principal. Therefore such a contract is binding against the principal if the agent had actual or implied authority to do so. In this context, actual authority is provided to the agent when the agent is granted authority, expressly or impliedly by the principal to act on its behalf. For example, when a company passes a resolution empowering the agent to bind accompanying case of certain contracts, it can be said that express actual authority has been delivered to the agent. On the other hand, implied authority of the agent takes place when, in view of the position of the agent, it can be expected by the third parties that the agent had the power to enter into contracts on behalf of the principle. The implied authority of the agent differs on the basis of their position with the principal and also the type of contract. For example, while it can be expected that the managing director will have the power to enter into a major supply contract, and therefore would have the implied authority to do so. However, regarding a junior employee of the company the same cannot be said even if such employee can be considered to have the implied authority of entering into minor contracts on behalf of the company as a result of his position in the company.

Enforceability of Contract Created by Peter with Mary for Purchasing Gold

There are certain cases, when actual authority may not be granted to the agent, but still a third-party may be allowed by the law to enforce the contract created by the agent, against the principal if it can be established that the agent and ostensible authority. Whether the agent had ostensible authority mainly depends on the way. The agent was presented by the principal to the third-party.  

(iii) Similarly, the law provides that when an employee acting as an agent had been fired but this fact was not known to a third party and it was under the impression that that employees had the authority to enter into a contract on behalf of principal, such contract will be binding against the principal. However, in such a case, the principal may have the option to sue the agent for the loss suffered by it.

• In this case, Sara was acting as an agent of Terence, but he forgot to tell this fact to Gabby. As a result, the contract created by Sara with Gabby can be enforced by Terence and also by Sara. The reason is that, Sara was acting as the agent of undisclosed principle, Terence. Therefore even if Gabby was not aware of the fact but she had also entered into a contract with Terence.
• In the second issue, Peter was acting as an agent of Terence. Therefore, although Terence had told Peter that he should not buy any more gold, but this fact was not known to Mary. Therefore the contract, created by Peter as an agent of Terence is enforceable against him by Mary.
• Similarly in the third issue, although Terence had fired Peter from service, but this fact was not known to Gordon. Therefore, when Peter contacted him through the business e-mail system, he assumed that Peter still had the authority to enter into contracts on behalf of Terence. Therefore this contract is also enforceable against Terence, although Terence can sue beater for the recovery of his loss.

(i) In the first case, the contract created with Gabby can be enforced by Sara and also by Terence.

(ii) In the second case, the contract created by Peter with Mary can be enforced by many against Terence.

Among the main motivations behind the formation of a separate legal entity is the limited liability enjoyed by its members and controllers regarding the obligations of the business of the company (Whincop, 1997). Therefore, in the form of a separate entity, companies incorporated for the purpose of protecting the shareholders of the company from personal liability regarding the obligations of the business or claims related with negligence (Farrar, 1990). That may be brought against the business. As a result of legal principle, the shareholders of the company are not considered as being personally liable for the obligations of the company including the debts of the companies beyond the initial capital investment made by the investors and at the same time, the shareholders do not have any proprietary interest in the property owned by the company as a result of the principle of separate identity and limited liability (Peate v Federal Commissioner of Taxation (1964) 111 CLR 443). This principle provides that the shareholders of the company can be considered liable only towards the company and not towards the third parties. As a result, a veil is created between the shareholders and the third parties (Briggs v James Hardie & Co Pty Ltd,1989). But it needs to be granted that there are certain circumstances where this veil can be lifted by the courts. This can be done by the courts in cases involving fraud or misleading use of legal entity (Thompson, 1991).

It is available to the courts left the corporate veil. In this case a legal decision is made by the courts consider the rights and obligations of company as the rights and liabilities of the shareholders. Generally, Corporation is treated by the law as a distinct legal person. However, there are certain exceptional circumstances where the court may decide to pierce the corporate veil (Ottolenghi, 1990). An example in this regard can be given of the case where a businessman quits his job as a director and he has signed a contract according to which it cannot compete with the company for a particular period of time. In order to avoid this stipulation, the businessman may form a company that competes with the former company. In such it is technically, it will be the company that is competing with the former company and not the former director. However in such a case, it is likely that the court may arrive at the conclusion that the newly formed company is merely a sham on a cover and therefore, the former employee can by the previous company for the breach of contract.

(ii) The leading case in this regard is that of Salomon v A Salomon & Co Ltd [1896] UKHL 1. This is a landmark case related with company law. The unanimous ruling delivered by the House of Lords had the impact of formerly upholding the doctrine of corporate personality. The effect of this ruling was that the creditors of an insolvent company were not allowed by the law to suit the shareholders of the company to repay the debt of the company.

• In the present case also, Roger Smith owns 92 shares out of the 100 shares in United Chemicals Pty Ltd. Now the company is not in a position to give the last installment of $200,000. As a result, Industrial Machines Ltd wants to sue Roger personally, as they know that Roger has the means to repay the debt. But it needs to be noted that in the present case as a result of the application of a separate identity, United Chemicals Pty Ltd is a distinct entity, and it is separate from its shareholders. As a result, the shareholders of the company cannot be sued personally for the debts of company.
• In the same way, Roger had established another company under the name of Explosive Industries Pty Ltd. He has 99 shares in the company and his wife owns 1 share. This company has been formed by Roger to circumvent a Commonwealth legislation according to which a person who has a criminal conviction cannot be granted an explosive manufacturing license. As Roger was convicted of theft, he forms a company and asked his wife to lodge an application for the grant of license on behalf of the company. However, the Department of industry declines to grant the license and points out the prior criminal conviction of Roger as the reason for declining the application. In such cases it is available to the court to pierce the corporate veil and to look at the identity of the persons who are running the company.

Conclusion:

• It can be concluded in the present case that the creditor of United Chemicals, Industrial Machines Ltd. cannot to Roger personally, for the recovery of the last installment of $200,000.
• The corporate veil can be lifted and the real identity of the controllers of the company can be considered. The reason is that the other company, Explosive Industries Pty Ltd. had been formed by Roger only to circumvent the Commonwealth’s legislative provision. As a result, the company is a sham or a facade. Therefore, the grant of license can be denied to Explosive Industries Pty Ltd. on account of prior criminal conviction of Roger.

References

C Mitchell, ‘Lifting the Corporate Veil in the English Courts: An Empirical Study’ (1999) 3 Company Financial and Insolvency Law Review 15.

Farrar, J  1990, ‘Fraud, Fairness and Piercing the Corporate Veil’, 16 Canadian Business Law Journal 474

Gelb, H., 1982 ‘Piercing the Corporate Veil – The Undercapitalization Factor’, 59 Chicago Kent Law Review 1, 2

Ottolenghi, S., 1990 ‘From Peeping Behind the Veil to Ignoring it Completely’, 53 The Modern Law Review’ 338

Sealy L.S. and Hooley, R.J.A., 2009 Commercial Law: Text, Cases and Materials 4th edn OUP

Thompson, R. 1991, ‘Piercing the Corporate Veil: An Empirical Study’, 76 Cornell Law Review 1036

Whincop, M., 1997, ‘Overcoming Corporate Law: Instrumentalism, Pragmatism and the Separate Legal Entity Concept’ 15 Company and Securities Law Journal 411, 420

Salomon v A Salomon & Co Ltd [1896] UKHL 1

Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549

PENINSULA BALMAIN PTY LTD V ABIGROUP CONTRACTORS PTY LTD [2002] NSWCA 211