LAW504

Indra Prasad Adhikari

11605582
Question No 1.
Issues
The first issue in this case is whether three partners Smith, Jones and Peters are liable
to pay Mary for the purchase of a surveying instrument.
The second issue is whether all three partners are liable to pay Mary for a mini oildriller.
Laws
Section 5 of Partnership Act 1892 (NSW), which describes the power of partner to
bind a firm is relevant to this case. According to this act, each partner is an agent of
the firm or other partners in relation to transactions falling within the normal scope
of business it does. Any act that has been done by any of the partners in usual way
binds all the partners and the firm. So, every partner can act as an agent of each other
and the firm for which all of them are liable.
This also means that a partner has an implied authority to make decisions that lie
within the normal scope of the firms business. As per section 8, this authority can be
restricted by the nature of business, which can relieve the firm of liability to 3rd party
if the 3rd party is aware of such restrictions. Where the third party was unaware of the
limitation, the partners will be bound despite a partner exceeding the limit. Simply
put, any partner using his/her authority for anything not pertaining to their nature of
business doesnt make other partners liable for it. This is illustrated by Mercantile
Credit Ltd v Garrod [1962] ALL ER 1103, where both partners were held liable.
Further, section 9 describes about the joint liability of the partners for the obligations
and debt incurred by the firm.
Therefore, all the partners are liable for any transaction done by one of the partners if
it is in the usual way. Exception applies when the partner carrying that transaction
has no authority and third party is aware of the lack of that authority (CSU LAW504
Modules, 2016, Topic 13).

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Applications
In this case, all three partners have an implied authority to enter into contracts
relating to the purchase of a surveying instrument. The agreement limited to
contracts worth up to $5000 does not affect the third party unless it has the
knowledge of the same. Here, Smith has bought an item that is in the purview of the
business but the price is beyond his authority. Mary is unaware of the purchase
authority of Smith. Thus, Smith, Jones and Peters, all are jointly liable to pay Mary
an amount of $6000 for the purchase of a surveying instrument.
So far as the mini oil-driller is concerned, the purchase has been done in usual
manner. The price also falls within the authority of Smith. However, the item is not
related to the business of a road surveying firm and Mary is aware of the type of
work United Surveyors does. In accordance to the law stated above, Jones and Peters
are not liable for the payment of the mini oil-driller. Only Smith can be held liable to
Mary for the payment of the mini oil-driller.
Conclusion
Mary has right to receive the amount of $6000 for the sale of a surveying instrument
from all three partners.
Smith is individually liable to Mary for purchase of a $3000 mini oil-driller.

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Indra Prasad Adhikari
11605582
Question No 2.
Issues
Is Steve liable to pay Thor Mining Machinery Ltd?
Is Steve liable to pay Volvo Trucks (Australia) Ltd?
Laws
In order to provide a legal advice to Steve, the following rules need to be discussed.
Sometimes, people in process of setting up a company can enter into contracts before
the company comes into existence. These people are called promoters. Contracts
made before a company comes into existence are termed as pre-incorporated
contracts. These contracts can cause legal risk in the future as to who will be liable
for any obligations (CSU LAW504 Modules, 2016, Topic 14).
Under the common law, a promoter could not be an agent because the company did
not exist (CSU LAW504 Modules, 2016, Topic 14). The company must have existed
at the time the agent made a contract on its behalf. The promoter would personally be
liable in such case as they do not have any implied authority to act on behalf of the
company.
Section 131 covers the issue where a person acts on behalf of an unregistered
company and pre-incorporation contracts. One thing, such contracts need to be
ratified by the company within a reasonable time. The contract is not binding on the
company if the ratification doesnt occur in a specified time. The other thing,
promoter is liable to 3rd party in the same way as the company would be responsible
for non-performance.
Companies registered and regulated under the Corporations Act 2001 (Cth) are
incorporated companies and the process is called incorporation. It creates a corporate
body or an entity which may also be referred as doctrine of incorporation.

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11605582
Section 124 discusses about the companys legal capacity and power as an individual
person. After the incorporation of a company, it forms a separate corporate body that
works as an independent legal entity. It also has a capacity to enter into a legal
contract. It can be sued and sue others in its own name. It is separate from its
shareholders and owners, which is also called the doctrine of separate legal entity.
This means the liabilities of the company are its own.
Shareholders of a limited liability company have no liability for companys debts.
The company is not an agent of its shareholders and rather is owned by them.
Also, the separate legal existence of a company means that it is the company that can
be sued for any failure to honor any contract with the third party. This was
established in the case of Salomon v Salomon & Co Ltd [1897] AC 22.
The principle of corporate veil has been established thereafter. It separates the
shareholder from the corporation. This simply means covering ones face by a mask.
So, lifting of corporate veil is the process of separation of the activities of the
corporation and its shareholders as different.

Applications
In this case, the first contract between Steve Jones and Thor Mining Machinery Ltd
is a pre-incorporation contract. This is because, Steve placed the order on 6th of July
and WA Gold Exploration was registered as a company on 10th of July. On 25th July
the board accepted the recommendation of a sub-committee and decided not to ratify
the contract that Steve made with Thor Mining machinery. As per the law, a promoter
is held liable to 3rd party if the pre-incorporation contract is not ratified by the
company once it comes into existence. This implies that Steve is liable to pay Thor
Mining Machinery.
On the second issue, the contract was made after the company was registered. The
contract was made between WA Gold Exploration and Volvo Trucks. The partners
only acted as the agents of the company. The contractual obligation arising in such
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case do not bind the individual partner of the company because the company acts as
a separate legal entity. Thus, WA Gold Exploration is liable to pay Volvo Trucks
(Australia) for a fleet of five ore trucks. The principle of corporate veil does not
apply in this case as the company do not have any intention of dishonoring the
contract. Hence, Steve is not personally liable to Volvo Trucks (Australia). However,
the companys assets are limited and already has accumulated $2 million in
liabilities. WA Gold Exploration being a limited liability company and assets worth
$400,000 only, Volvo Trucks (Australia) might not be able to recover the amount it
has claimed.
Conclusion
Steve is liable to Thor Mining machinery for the payment of $125,000.
In case of second contract it is the company, not Steve, who entered a contract with
Volvo Trucks (Australia) Ltd. Volvo cannot hold Steve liable for the payment despite
WA Gold exploration company having assets worth $400,000 only.

References
CSU LAW504 Modules. (2016).
Statutes
Partnership Act 1892 (NSW)
Corporations Act 2001 (Cth)
Cases
Mercantile Credit Ltd v Garrod [1962] ALL ER 1103
Salomon v Salomon & Co Ltd [1897] AC 22

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