Commercial Law - Acme Electrical Engineering Company Limited - Assignment Example

Commercial Law Name Course Lecturer Institution Date of submission Question 1 Separate Legal Entity In Australia, upon registration as per the Corporations Act 2001, a corporation becomes a separate legal entity that is distinct from, inter alia its memberships and directors (Corkery & Welling 2008). This separate legal entity is referred to as the “veil of the incorporation”. According to Section 124 (1) of the Corporations Act, the conferral of identity authorizes corporations to operate as natural persons where they can sue and be sued, hold property and have contractual relationships. However, in reality, beneficial owners who own the Company’s property run a corporation. In adherence to the concept of separate legal entity, the real beneficiaries that are behind the company are disregarded immediately after they have set up a corporation and conferred the status of a distinct legal entity. The legal concept for the doctrine of separate legal entity is observed in the case of Salomon v Salomon and Co [1897] AC 22. In this case, House of Lords in 1897 acknowledged that the parliament had acknowledged the establishment of Companies as distinct legal entities. The courts are therefore, bound by the fact that corporations would not go behind the “veil of incorporation” because they are separate legal entities distinct from their members (Australia 2011). However, the veil of incorporation has been lifted in cases where the corporation veil has been used for illegality, fraud, and improper purpose or when the court has to ascertain the “alter ego” of the Company (Graw 2012). Limited Liability Limited liability is another benefit that stems from incorporation where the obligations and debts of a corporation are distinct from those of its members unless the corporation veil has been pierced. Limited liability is the antithesis of contract and a privilege that has been bestowed on investors and shareholders who will not be entitled to the corporation’s debts as they will only be liable for the amount of money provided (Australia 2011). In essence, no one would risk more than the amount invested in the corporation. In the Australian Company Law (ACL), a corporation whose members have limited liability will be incorporated under a “proprietary Company”. This is outlined in Corporations Act 2001 (Cth) Section 45A. In section (12), limited liability ensures that whenever corporations go bankrupt, shareholders will only stand to lose their investments (Corkery & Welling 2008). Having a limited exposure in every firm, investor will be encouraged to diversify their portfolios as far as shares are concerned. Australian corporation’s law embeds limited liability on the contractual principle where parties may come to a consensus to limit their liabilities exposure in those corporations which they are a part of. This freedom of contract authorizes any permutation of this hypothesis be it limited, unlimited or pro rata liability (Graw 2012). In common law, every party is liable upon their contracts up to the amount they are entitled to. An example is a debt acknowledgement which is only limited to the debt amount. However, the limited liability of a member is eroded if he/she plays a role in the orchestration of a company. The general principle is that there are circumstances where parties ought to bear liability regardless of the corporate façade that has been provided by the ‘anti social’ act (Graw 2012). Question 2 Acme Electrical Engineering Company Limited (Acme) has contracted to provide its electrical services to a warehouse construction of King’s storage Company Limited (King’s). In their contract, clause no. 20 excluded Acme from any liability that may stem from its performance or non-performance of the contract to $150,000. Fire broke out in the warehouse six months down the line and was attributed to an electrical fault and Kings Company suffered a loss amounting to $600,000. Acme claims that if it is liable, its liability would be capped at $150,000. The argument that Acme could raise in defense against claims for the loss suffered by King’s revolves around the exemption/exclusion clause set out in the contract. According to the Australian Consumer Law, an exclusion clause exempts one party in a contract from the liability to anticipated losses in the process of executing the contract. The clause is always be valid so long as it has been included in the contractual terms and it is not contrary to the law (Corkery & Welling 2008). The incorporation of an exclusion clause may be done by notice, signing a contractual document or by course of dealing (Graw 2012). Acme would therefore argue that the exemption clause protects the accused from any liability beyond the stated amount of $150,000 and as such, the claim for $600,000 cannot be enforced. This is because the clause was incorporated in the twenty pages contract that was signed by both parties. In addition, the wordings of the exemption clause were precise and clear (unambiguous) because the contract was signed by both parties as a sign of willingness by both parties to be legally bound by the contract. However, the Competition and Consumers Act 2010 (Cth), s64A states that the exclusion clauses can be unenforceable whenever the exclusion clause purports to exclude the liability of the conditions and warranties of implied terms. Acme would therefore argue that its exclusion clause is still valid, as it did not act to exclude the liability of any condition or warranties. Arguments by King’s to Dispel the Defendant’s Argument The arguments that King’s would raise in regards to Acme’s liability is that the exclusion clause in the contract cannot be enforced because Acme failed to exercise due diligence and care when providing the electrical services to King’s. In the electrical investigation, it revealed that some new type of material used in some of the fittings did not conform to the specifications Acme provided. This shows some negligence on behalf of Acme as they had already noted they would require the material in the electrical engineering. Under Section 60 of the Australian Consumer law (ACL), contracts entailing the supply of services contain an implied warranty whereby services ought to be delivered in due care and skill (Corkery & Welling 2008). In addition, the Unfair Contract Terms Act 1977 covers contract terms that purport to restrict liability in contractual relationships. Section 3(UCTA) of this act clearly outlines that where either a notice or contract term purports to exclude liability for negligence, then a person’s agreement to it would not be used as an indication of risks or voluntary acceptance. In Section 3a (UCTA), any obligation that may arise from the express or implied terms of the contract to exercise caution and reasonable care should be conformed to. King’s would therefore have the strongest argument because the Australian Consumer law and Unfair Contract Terms Act 1977 cover any liability that may arise from contractual liability or negligence. The exclusion clause by Acme would not favor them because they failed to practice due care and skill and a court of law would not place any reliance on the exclusion clause. In addition, house of Lords would rely on previous court ruling in such as Smith V Eric Bush [1989] 2 All ER 514 whose ruling support need to award King’s claims for the damages based on the negligence principle. Question 3 Zig and Yul negotiated the sale of Zig’s business for $750,000. Yul already knew that that part of the town was infected by ants and overheard that one of Zig’s clients will be moving. Three months later, Yul’s office furniture was badly damaged by ants and the local factory, which manufactures car mirrors, had relocated to other premises. This meant a significant drop in profits and Yule now thinks Zig should take back his business and return his money. The argument that would be raised by Yul is that Zig made false statement that induced him to enter into the contract (misrepresentation). A misrepresentation is any false statement made by one party or his agent before making the contract and which induces the other party to make the contract (Graw 2012). Zig failed to precisely disclose the fact that the local factory, which manufactures mirrors, will be moving. Section 29 of the Australian Consumer Law prohibits any false misrepresentations that induce parties to enter in contracts. Yul would also claim that the misrepresentation was fraudulent because Zig made the statements knowing they were false and which is prohibited by Section 12DA of the Australian Securities and Investment Commission Act (ASIC) 2001 (Australia 2011). The local company had brought it to his attention that they would relocate sometimes in the future. In Hedley Byrne v Heller [1964] A.C. 465, the House of Lords held that a person owes a duty of care when advising or providing information to a recipient as long as there is a relationship between the two parties (Fiduciary Relationship). Zig was supposed to practice due diligence when giving information to Yul because there was a buyer/seller relationship (contractual relationship). Moreover, Yul had placed so much reliance on the information Zig gave him to a point that he would not make the contract had Zig spoken nothing but the truth. Yule relied on the information as a fact as opposed to just mere representation. The ambiguity of the information provided by Zig leaves room for interpretation, as he did not answer questions succinctly. In section 2 (3) of the Misrepresentation Act, damages may be awarded to a person if it is apparent that a misrepresentation had been made to him and may be entitled to rescind the contract by reason of that misrepresentation. This has also been stated in Section 18 of the Australian Consumer Law. On the other hand, Zig would argue that the fact that the local car company would relocate does not amount to misrepresentation because this was a future event whose occurrence was unpredictable and as such, could not be treated as false or true at the time the information is availed. In addition, some sellers make some comments about an item to arouse interest in some buyers. In such scenarios, it is the responsibility of the buyer to carefully inspect that particular item or find an expert to inspect it if need arises to come up with an informed judgment and not merely rely on the information provided by the seller (Graw 2012). When Yul brought up the question of white ants, he was given the authority to “check if he liked” and he just let it slide by going with Zig’s answer. Moreover, if Zig claimed that there was any white ants infestation and Yul clearly saw the damage done by white ants on the office furniture or the roofing timber, then the court will not take into consideration the fact that he relied on what was said per say. Yul has a stronger argument because Zig failed to disclose all the material facts such as the moving of car mirrors manufacturer and this amounts to misrepresentation. The contract can therefore be rescinded on these grounds as it was held in Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 . References Australia 2011, Australian corporations & securities legislation 2011, CCH, North Ryde, N.S.W. Australia. Corkery J, F & Welling, B 2008 , Principles of corporate law in Australia, Scribblers Pub Mudgeeraba, Qld. Graw, S 2012 , An introduction to the law of contract. Thomson Reuters (Professional) Australia Limited, Rozelle, N.S.W. Read More