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Contract and Corporation Law - Question 1

The obligation to performance in the good benefits of the organisation has remained recognised as a primary duty of a director of a company by majority countries all over the world by way of provisions in statutes. The legal system followed in Australia, which is based on the Common Law System has also maintained this provision in its statute- Australian Corporations Act, 2001. The common law has recognised the rule for the same since the last 100 years. Section 181[1] specifies the obligations that has to be maintained by a executive of a corporation in ‘Good Faith’.

The cases decided by both the Australian Courts as well as the UK courts provide various interpretation for the provisions of the statutory words. Each different decision given by the courts adds to the complexity and uncertainty of the issue. It needs to be clarified that the benefits of the business are different from those of the shareholders. Although, there are a number of cases that decide against the same. The director of the institution owes a responsibility to act in good faith for the finest benefits of the organisation and not the share-holders. Often the interests of the corporation merge with that of the share-holders, but in case they don’t, the director shall not be liable for acting against the interests of the share-holders if it is for the welfare of the corporate. It may be said that the phrases ‘greatest interests of the company’ and ‘the best interests of a company as a whole’ are different and only one of them includes the interests of the share-holders. There are various case-laws on the topic, which decide on either of the propositions. In Walker v Wimborne,[2] the directors of the company were held in violation of their responsibilities towards the company when they curtained loans of another corporation at a time when the organisation was itself in grave economic crisis. On the other hand, the landmark case of Foss v Harbottle[3] holds that the company is the rightful party to bring a civil suit against the directors when there is a breach of duties. In Mutual Life Insurance Co of New York v Rank Organisation Ltd,[4] it stood decided that the managers and executives were not in violation of their responsibility to act in the welfare of the corporation when they decided to go forward and make available a rights issue to a specific number of the share-holders who held ordinary shares. The verdict by the directors left out the corporation’s American and Canadian shareholders from the issue of rights share and was discriminatory in nature.

The general duties of the directors towards the company have been provided in sections from 180-184 of the Act.[5] The breach of any of the mentioned duties[6] or a breach of any common law provision makes the company eligible to file a civil case against the director. The legal provisions of Australia also enable the Australian Securities and Investment Commission (ASIC) to file proceedings against the director. Acting in good faith for the best interests of the company is inclusive of a number of other duties. The relation between a director and the company is often recognised as one of agent-principle or the director being the trustee of the company, the only difference being that a trustee has control over the properties of the principle while the director is not provided with a similar power. Thus, the duty to act in the best interests of the company includes:

  • The duty not to make secret profits from the transactions of the company.
  • Not to be a part of transactions which may conflict with the interests of the director

In the landmark case decided in UK, Greenhalgh v Arderne Cinemas Ltd[7], it was argued that it was the director’s duty to follow the decision that was made by the share-holders by way of votes in the meetings of the company. In the present case, the decision of the majority shareholders was oppressive in nature. It was argued that when the directors were working in the best interests of the organisation, the interests of the shareholders were a part of the same. However, it may be considered that a few years before the case, in the case of Short v Treasury Commissioners[8], it had been held by the same court that the undertaking of the company was separate from shareholding and it could not be said that the share-holders were the owners of the company. The situation in UK became further complicated when the Greenhalgh’s Case continued to be applied to subsequent cases.

The debate of whether to include the interests of creditors and shareholders within the interests of the company while deciding the duties owed to the company by the director went on for years and created confusion with each decision that was made, which conflicted with the previous reasonings of the court, but a final conclusion was reached in Australia in the year 1974 with the case of Howard Smith Ltd v Ampol Petroleum Ltd[9], where the Court recognised that the duties owed by a directors towards the company varied in different situations depending on the size of the company and the situation in which the decision was taken. Thus, the powers and duties of the directors cannot be interpreted in a limiting manner. This decision was reiterated in the subsequent decision of Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co No Liability[10].

A famous test called the Charter-bridge Test was applied on some cases in Australia but was criticised largely and thus did not gain much prominence. The Test lays down that if any reasonable, honest and intelligent man acting in the place of the directors of the corporation/business could have foreseen and believed that the transaction entered into was for the benefit of the company then the directors of the company will not be held liable for breach of their duty to act in goof faith for the interests of the company. The test was first used in New Zealand in the case of Charterbridge Corporation Ltd v Lloyds Bank Ltd.[11]

The interpretation of Section 181(1)(a)[12] by the Australian Courts has been stabilised to mean that the duties owed by the directors are towards the company as a separate legal entity. The previous understanding of the duties of directors were before the concept of the separate legal entity of the company was established and the concept of corporate veil was lifted. However, the interests of the company are interdependent with those of the shareholders, but they are not eligible to file a suit of claim against the director.

Contract and Corporation Law - Question 2

The provisions of contract law followed in Australia are not codified or governed by a single piece of legislation. The provisions of common law system have been followed by the courts in Australia to decide cases on contract issues and have been set as precedents which are referred to decide further cases and the basics have been borrowed from the English Law of Contracts. The formation of a valid contract follows the requirements that are recognised by a majority of the countries all over the world as well as the international bodies and the Common Law System. The breach of a contract is usually understood when one party and ended the agreement or refuses to fulfil its obligations according to the contract and the decision is on the Court if the party should be allowed to do so. The case of Koompahtoo Local Native Land Council v Sanpine Pty Limited[13] is an important case as it gives the conditions with regard to the circumstances in which a party may be allowed to terminate a contract due to a breach having been committed by the other party. This is a recent case in which the decision of the Hong Kong Fir case was upheld and it was recognised that three types of contractual terms have to be recognised: Warranties, Conditions and Intermediate terms, and the rules shall be applicable on the same.

The discharge of a contract is recognised in a specific number of ways by the Australian judiciary. The recognised aspects are:

  • Discharge by Performance- The performance of the obligations as set by the contract for each party ends the contract by way of performance. The performance depends in the way the contract has been constructed. If the contract requires, the performance may be exactly according to the steps provided in the contract, or exact performance may be nullified if the parties agree.
  • Discharge by Agreement- On the occasion of a happening of an event, the contract may be terminated as agreed within the provisions of the contract or by subsequent agreement by the parties.
  • Discharge by Breach- in case the contract is breached by a party by way of non-performance of the obligations mentioned in the contract, the non-breaching party is given an option to terminate or repudiate the contract. This can be done on 3 different occasions:
    1. The contract entered into by the parties contain the provisions and give the power to the non-breaching party to terminate the contract in case of a breach.
    2. If the party refuses to perform the obligations mentioned in the contract then the contract stands breached and is automatically terminated.
    3. If the Court finds that the breach was a major one, then the party may be allowed to terminate the contract. According to the precedents set by the Courts in Australia, a contract cannot be terminated for a minor breach.
  • Discharge by Frustration- a contract may be terminated due to the impossibility of fulfilment of contract. The impossibility of fulfilling the obligations of a party has to be due to the happening of an event that is beyond the control of either parties and the happening of the event could not have been foreseen or avoided by either of them. The Doctrine of Frustration is applied of such situations and the contract is automatically terminated by the occurrence of an event. The event may be an Act of God, a natural disaster or any kind of event that could not have been foreseen and prevented by the parties. The Courts do not allow the application of the Doctrine of Frustration if it is established that the occurrence of the event could have been anticipated by a reasonable man. The landmark case of the Doctrine of Frustration is Taylor v Caldwell.[14]

In the analysis of the given phrase, it has to be noted that the breach which is committed has to be serious and either ‘frustrate the purpose of the contract’ or ‘substantially deprive the party who is not at fault of the complete benefit of the contract’. These criteria were let down in the case of Hong Kong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd,[15] in which Diplock LJ held that a contract could be allowed to stand terminated by the court if it was proved that the non-breaching party was deprived of any complete or substantive benefit arising out of the contract. The case that was relied on to reach the conclusion for the Hong Kong Fir Shipping Co. Case[16] was the case of Photo Production Ltd v Securicor Transport Ltd[17] in which the term ‘fundamental breach’ was used. It was held that to terminate a contract, it had to be proved that ‘fundamental breach’ had been committed by a party. In the case of Ankar Pty Ltd v National Westminster Finance (Australia) Ltd,[18] it was made evident by the Courts in Australia that if there is a scope of the contract working out and if the damages can be recovered by monetary compensation, then the court tends to give an opportunity to the contract and does not terminate it at once. A doctrine was developed after the decision of the Hong Kong Fir case and was named the Hongkong Fir Doctrine. But it was criticised and scholars said that there were limitations to the application of the Doctrine. The restrictions were listed out to be:

  • The Doctrine can be applied only to a specific category of contracts and cannot be applied on all contracts;
  • The Doctrine cannot be applied on contracts which have been breached die to time specifications;
  • The Doctrine can only be applied on provisions that are a part of the contract since inception; and
  • The Doctrine can be applied of the whole contract and its application on a part of the contract shall not be valid.

The above stated case-laws have made the stand of the Courts in Australia very clear. They do no terminate or repudiate contracts due to minor breaches and attempt to keep a contract valid till the time the damages can be recovered. The contracts are terminated only in a case where the non-breaching party is being deprived of the benefits of the contract either substantially or wholly.

Reference for The Enforceability of Termination

All Answers Ltd. November 2018. Duties Owed by Directors of Listed Companies. [online]. Available from: https://www.lawteacher.net/free-law-essays/business-law/duties-owed-by-directors-of-listed-companies-business-law-essay.php?vref=1 [Accessed 17 October 2020].

Bennett, M., 2012. Breach & Terminating a Contract. Wentworth Selborne Chambers.

Brownsword, R., 1992. Retrieving Reasons, Retrieving Rationality?: A New Look at the Right to Withdraw for Breach of Contract.

Carter, J.W., 2008. Intermediate Terms Arrive in Australia and Singapore. JOURNAL OF CONTRACT LAW, 24(3), pp.226-250.

Carter, J.W., Tolhurst, G.J. and Peden, E., 2006. Developing the Intermediate Term Concept. Journal of Contract Law, 22, p.274.

Courtney, W., 2019. Good Faith and Termination: The English and Australian Experience. The Journal of Commonwealth Law, 1(1), p.7602.

Evans, P., The Enforceability of Termination for Convenience Clauses. Law and Dispute Resolution, p.79.

Gamble, R., 2008. Australia and the Intermediate Term-No Country for Old Rules. Monash UL Rev., 34, p.457.

Harris, J., Hargovan, A. and Austin, J., 2008. Shareholder primacy revisited: Does the public interest have any role in statutory duties?. Company and Securities Law Journal, 26, p.355.

Klein, E. and du Plessis, J.J., 2005. Corporate donations, the best interest of the company and the proper purpose doctrine. UNSWLJ, 28, p.69.

Langford, R.T. and Ramsay, I., 2015. Directors' Duty to Act in the Interests of the Company: Subjective or Objective?. Journal of Business Law, pp.173-182.

Langford, R.T., 2011. The Duty of Directors to Act Bona Fide in the Interests of the Company: A Positive Fiduciary Duty? Australia and the UK Compared. Journal of Corporate Law Studies, 11(1), pp.215-242.

Langford, R.T., 2013. The Distinction between the Duty of Care and the Duties to Act Bona Fide in the Interests of the Company and for Proper Purposes.

Swanton, J., 1981. Discharge of Contracts for Breach. Melb. UL Rev., 13, p.69.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Law Assignment Help

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