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Contract Law

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Question 1 (Martina’s faulty racquet strings)

In contract law, the issue of the vendor selling a defective item with clear intention is punishable through him or her paying for the damages to the client. Martina trusted the racquets expert that he will sell her excellent strings to enable her play and win the game. But after some time, the strings broke in the process of playing making her not to reach the finals. All endorsements worth $20000 went away because of faulty racquet strings.

Under implied warrant in contract law, there is an express view to prevent or mitigate deceit and fraud to make persons be fair in their dealings, to be honest, and to be upright in all their transactions. Matrina entered in to a special contract with the racquets expert in Melbourne that she should be given high quality strings for her racquet, but she later recognized that the strings never had qualities she wanted. According to contract law, if in any case the special contract has been exercised for the sale and or purchase of goods of certain features, quality and description, and that particular good does not portray the same description as those stipulated by the vendor, or bargained for, or agreed to be sold, the buyer has a right to not only return the faulty equipment, but to be given compensation concerning the issue of being sold a faulty equipment. 

All the compensation stated in this case is not limited to the price of the item he or she bought, but it should, be inclusive of all the costs the buyer accrued in meeting the purchase and those costs and expenses, which directly link to the purchase of that product. Matrina need to be compensated for her travel costs, her forfeited token, the accommodation costs, training for championship costs and loss of endorsement fees, and disappointment fees.

If the purchaser, however, neglects to return the faulty products she has bought within the stipulated period, a new contract will arise by the full implication of law, totally different from, and totally independent of, the previous agreement, and the person who has received and willing fully retains that goods is directly liable upon what is called a quantum meruit to pay for the presumed worth of the good. If Matrina stays with the goods (racquet strings) after the vendor has failed to perform his contract, she may recover the value of these items upon the new contract and the eventual promise that the law then applies from the changed situation and consequences of the parties.

In all sales or purchases of products, the law stipulates an undertaking or a due promise from the seller that at no time carried out a bad sale, and that he had no obligation to make the contract of sale he had profess to make. Peto vs. Blades case indicates that if the seller knowingly or intentionally sold defective goods, he is entitled to indemnify the buyer against the damage he had already sustained. This damage is inclusive of loss of endorsement fees, disappointment and distress, travelling costs and accommodation costs.

If Matrina was cognizant of the defect in the strings, materially reducing the value of the said item, the low has an obligation to carry out a disclosure thereof to the intended buyer, and informing in silence the fact of substance, which needed in utmost good faith be made known, and is equivalent, in law’s contemplation to a valid express representation or even warranty (Hill vs. Gary). If for example, a taverner sold wine knowing that the wine is corrupt, to a buyer as a good wine, although he impliedly expressed to warrant it as such, yet a certain action showed that he lied, he is required by law to compensate the buyer. Also, if the merchant sells a piece of cloth to the buyer, knowing that the cloth is not in good condition, he is responsible for compensating the buyer (Atkinson vs. Bell ). To justify that Matrina is liable for full compensation, we consider the case of Southern vs. Howe. It states that if an individual sold a horse with no eye, no legal action against him since the buyer already observed that the horse lacked one eye. But if the seller fixes an artificial eye to lure the buyer in to believing that the horse has both eyes and later finds out that indeed the other eye is counterfeit, the seller is liable to compensate the buyer for such actions. Therefore, the racquet expert in Melbourne has an obligation to compensate Matrina to the extent of having implied with the conditions of the contract.

Some times it is possible for the buyer to complain that he never knew of the defect’s existence. He must, therefore, proof that what he did was not intentional by revealing other sales of the same items he had sold to other clients, that indeed they were not defective. If Matrina agrees to eventually take the sale issues with all faults, there exists an implication of one part of the racquet dealer to resort to no device or possibility to conceal any defect. The seller should reveal that indeed he sold defective strings and that he is liable to duly compensate the buyer. The condition to be taken inclusive of all faults and frauds, do not entirely mean that the item to be undertaken with all existing frauds, and hence, the seller will not be allowed to present himself of it if he decides to resort to any artifice, or makes use of false representation, with the intention of convincing the purchaser to forget about the contract of sale. Defective items sold have adverse implications, which will cost the buyer a lot, therefore, all the burden of compensation lies directly on the vendor who sold the defective goods.

Question 2 (The case of Jilna and Lee)

If a contract has been made and because of one reason or another, the other party is not able to perform his or her obligation, then this constitutes frustration. Jilna seems not to have read the lease agreement letter properly, as she thinks that the lease was only running for one year, yet the letter indicated it was running for five years. This frustrates Lee so much because of the complication with the contract. Jilna sees it as no longer possible for her to continue with her bicycle manufacturing business because of road blockage, which has made supply of materials to her factory paralyzed. Besides, the roads department has told her that it will take three months for all the trees blocking the road to be removed. As such, she will not be able to manufacture her bicycles, implying that she will not be able to make any sale. This could be understandable that she won’t be able to pay any rent, but the contract she made is binding.

            Frustration concerns the subsequent impossibility. If the contract appeared to be impossible from the start, the issue will be the mistake but not constituting frustration. Jilna should, however, establish as to whether or not the situation at hand has been expressly shown in the contract- the lease contract. This provision is normally called force majeure clause. For example , a contract of manufacturing bicycles using Lee’s  factory premises might say, if a factory collapses, or the external disasters that will negatively affect the performance of your business and hence, making you unable to pay the monthly rent, take place, then this will happen… This clause ought to be complete and should stipulate specific risk(s). Since there is no force majeure clause in Jilna and Lee’s contract, there are various frustrations that are established in case laws. Supervening illegality stipulates that immediately the contract was made, a new law or a new occurrence has made it illegal for the contract to be carried out. The best example of the case law is Avery vs. Bowden (1856), in which a certain ship was supposed to pick up some specific cargo at port of Odessa. With the occurance of the Crimean war, the government passed a rule that is illegal to load the ship at the foe’s port. Hence, the ship could not undertake its contract without having broken the law. Hence, the contract was frustrated. When the hurricane fell on the land and fell the trees that block the road leading to Jilna’s factory, Jilna was not able to carry out her business hence, frustrating the contract she made with Lee.

The performance of the contract under this scenario of supervening illegality will not take place or will be impossible. The reason is because of the eventual destruction of the subject matter (factory premises). Jilna, for example will say, ‘I agree to pay you monthly rent, but the road to the factory get blocked.’ This complicates the performance of the contract they have both signed, though Jilna never took her time to know to what extent the agreement was binding. The nature of contractual obligation may also make the contract not to perform in the stipulated way. A very good example is the case of coronation of King Edward VII in 1901 where the coronation process failed because the king was ill. One person had hired a flat in order to view the coronation but refused to pay the day’s rent, since the existing contract had been frustrated. The court said that he was indeed right: the whole idea of hiring a room was only to watch the coronation ceremony, and since the ceremony never took place, then there was no need of hiring the said room ( Krell v Henry ).

But a contract is not frustrated only just because it has become very expensive or uneconomical to perform. This kind of risk occurs immediately when one enters into a contract. The supervening even, however, must be beyond the ability of both parties to control. Neither Jilna could not have been able to prevent hurricane from passing near her factory, nor was Lee able to inform Jilna in advance that there could be a hurricane passing by, so that she could be informed. As search the event (hurricane) was unforeseeable by both parties (Jilna and Lee).

The legal effects of this frustration by the common law becomes the contract which was made automatically comes to a halt at that exact time of frustrating event. Immediately the hurricane caused havoc on the road, and hence making supplies difficult from reaching the factory, Jilan’s factory operations stopped, hence signaling that she will not be able to pay the stipulated monthly rent, as shown in the contractual letter. The recommended statute is the Law Reform (Frustrated Contracts) Act of 1943, which is only applicable in a situation where there is no express permission existing in the contract for anything that happens if it is frustrated. The provision is that, if some payments have been made in advance, the lessee or the buyer has a right to get the payments back, net of any expenses that he or she could have incurred. Jilna had not yet paid the rent, but she might have incurred the expenses of renovating the factory hence, she will not be in a position to ask Lee to pay her the expenses she has accrued so far. Lee is also frustrated by the fact that Jilna will not be able to pay the monthly rent as indicated in the contract, and that she never understood the terms and conditions in the contract after all.

If the contract had been partially performed, as shown by Jilna who had already undertaken the factory operations, it gets a little bit complex. She will be required, according to the contract, to pay for any of benefit she could have received. If for example, at the time of the frustrating event (Hurricane), Jilna had already made some refurbishments in the factory, Lee had to compensate Jilna for all the expenses incurred in refurbishing the factory. She could value the amount of factory upgrade and ascertain whether it will be able to give a one month rent, since Jilna will no longer be able to carry out the business.

The case of Brisbane Council vs. Group Projects Pty is also another example of a frustrated contract, which depicts what happened to Jilna and Lee. Under this case, the Group Projects had some land which was to be developed. The company came into agreement with Brisbane City Council that the company should undertake some work on the land immediately the land was rezoned residential. The thing, which later happened, is that the land was forcefully resumed by the government to be used as a school. The City council of Brisbane argued that, until the extent that Group Projects had said to carry out the development work in the land, it was still justified to go on. The company mentioned that the whole idea had been frustrated since its ability to make profit had already been removed when the said piece of land was rezoned. The case raises some interesting debate as to whether it can be said that frustration existed when the commercial interests of the above contract had been removed or not. The high court officials who said that the issue had no difficulty  are holding that the contract was frustrated because of the eventual resumption of the land. Lee’s plan to enjoy monthly revenues of $ 5000 per month was frustrated by the fact that Jilna will not be able to carry out her agreement to be paying her $ 5000 per month as lease rentals for 5 years. One can view other tangible issues facing frustration of the contract by looking at the conclusion of Stephen J (p 766) 4th paragraph and also interesting or thrilling commentary on the subsequent paragraph about how frustration is so uncertain.

The hurricane was not easily predictable by both parties. If it were, then Jilna could have given her own side of the story as tow whether to continue with her operations or stop it altogether. The case of National Carriers Ltd vs. Panalpina Ltd is applicable to Jilna and Lee’s case because, before the decision, it was meditated that the doctrine of frustration will never be applicable in real estate, even including leases. The reason is because, real estate is actually land and the land is everlasting.  The National Carriers type of case involved the commercial lease of a warehouse. The existing access to the warehouse was blocked by a local authority, which decided to close the street since the state of building the building in the street was not safe. The lease was supposed to run for ten years. The same street also was to be closed for a period of 18 months. Tenants said that the lease agreement was frustrated.

However, it is said that the doctrine of frustration does not normally apply in real estate. In the said case, the tenant was in possession of a premise (warehouse) which was the subject of the lease agreement. Lee likewise had a factory, which was also the subject of the lease agreement. It will not matter what will happen, even if the building is destroyed since the interest of the land continues on. This is somehow, a very unrealistic view of commercial issues. In the issue of National carriers, the House of Lords reiterated that the frustration doctrine will apply to lease agreement but insisted that the cases will be very rare. The main facts of the case is that, they concluded that this lease was not frustrated since the deprivation of the tenant was so small compared with the lease term of 18 months in a period of ten years.

Question 3 (company formation)

For me to ensure that I have become successful in undertaking the venture, I need to understand the ways in which I can raise my finances. Already, I have savings amounting to $ 300000 and the bank has agreed to give me extra $ 300000. This comes to $ 600000. To make it $ 1 million, which is required for me to establish the company, I have found 40 investors, each willing to pump in $ 10,000 into this business, after understanding that this project will be profitable and the payback period will be shorter.

Of great concern is to whether to make this company go public or to operate it as a private company. Remember this company is still at its seed or concept stage, where I am supposed to be developing the business plan and mobilizing resources in order to make it a reality. It will be realistic to put it this way- we run this company as private limited company for some few years in to the future since you understand the disadvantages of making it go public this early. I need to develop a strong object clause of the company, according to the Corporation Act which stipulates that companies should express the object of their operation. My object in the company is to explore the organic mineral development storage devise for electricity.  I know that the provisions of the Act allow me to undertake this activity as it says,’ a provision of the corporation legislation does not: prohibit the doing of an act, or, impose a liability for doing an act, if the provision of the law of State or Territory specifically authorizes the doing of an act.’

I also know that my company needs to set up and maintain a register of members, a register of financial undertakings, a register of earnings to be achieved and the initial financing options. Also, we need to understand the company structure, company name, legal obligations, company registration and legal obligation concerning our company name so that we can not violate the Corporation Acts provisions. Before we think of whether this company is going to be private or public, we need to consider if this company wills suite the needs and follow the proper established legal framework as deviation from it will lead to total discontinuation of our plan to establish this company. This company can conduct business throughout Australia, but we need to get the provisions right. When we think of registering the company name, it is not the same as registering our company. Registration of our company name does not in any way create a legal entity but rather registering the company itself, does. Registration of the company name, according to Corporations Act, allows us to use the privileges to which our company is entitled, like corporate tax rate and limited liability. In order for us to register the name of our business, we need to consult the corporations act provisions.

Concerning how to run this business, we need to decide the internal governance and how it affects replaceable rules, constitution and the general business operations. This is a proprietary company, and it cannot be run by replaceable rules if initially I am going to be the director and member and, therefore, special rules apply. Since this is proprietary company, corporation act allows the company not to lodge its constitution when duly applying to register. However, Corporation’s Act must be followed in order to avoid any possible violation. The company will ensure that contracts over $ 20000 will require immediate approval of the managing director. No contracts above this will be allowed without the directors’ consent.  Since there will be investors who have stakes in this company, the corporation act will require the company to provide their registration information and the amount they each contribute. Date of entry of each and every investor or member must also be indicated. If this company will get membership of over 50 people, the company scheme should include in its members’ register an updated index of member’s name. This index must be easy to use and should allow member’s entry to be found easily. If this company is to stay to be proprietary, we must satisfy all the provisions of the particular type of the company.

If this Company becomes a public company,   relevant procedures must be followed. The company should indicate how shares are to be allocated, how additional capital is to be raised, and the reporting standards to be used and tax payment strategies. We need to give all the details required so that we can be successfully registered. This will make this company to operate legally as a corporate body at the very day it received its certificate of registration. When registered, we need to ensure that we are given ACN (Australian Company Number) as required by the Corporations ACT. If we are given ABN, the number we get should end with the nine digits we have already received. The company name, written in legible characters, is followed by ‘ Australian Company Number’ as appropriate.

This means that we need to satisfy all the requirements of the Corporations Act in order to enable us become an officially and registered company in Australia. All documents should be issued, at the right time so that we cannot risk being deregistered.

Question 4 (Case of Amanda and John)

As a start up company, Amanda and John will not be able to access a wide pool of funds. When the company is too young, profits are usually less and there is instability in profitability projections. Legally, it is not allowed for one to go for other debts without clearing the existing one. Amanda’s case indicates that her money is all tied in trusts as she has been acting as a trustee for her family trust when the family was not able to meet the trusts. Therefore, thinking to carry out business as a partnership and as a company should be clearly evaluated because both different business types have different legal attributes.

As a partnership, both must understand that they have mutual obligation to carry out the business. Considering that they can only manage to raise $60000, it means that they will not be able to meet the required capital target, what with Amanda in deep financial turmoil. As a start up business, both individuals should require the initial amount so that business will be carried out smoothly. Both of them have a contractual obligation to look for ways of raising the other $90000 to finance the business. Start up businesses are usually the most challenging businesses to undertake since they may either collapse or experience slow growth. If both of them are considering venturing in to partnership, it is essential that they consider all options before they make any decision. Choosing a business structure that will be supported by the capital stated is very wise.

The success or failure of their business depends on how the two individuals design their business structure during the concept stage. Since the success of partnerships is determined by the partners, both of them should ensure that they raise the extra amount in order to finance business development. Though there are advantages in partnership like work sharing and skills supplementation, they understand that legal obligations must be strictly adhered to when it comes to sourcing extra financing from other sources. It is very essential to understand the business laws, which are associated with partnership, so that both of them should not be faced with legal problems. It is very vital if both of them will speak to the business lawyer or attorney before thinking of any option to turn the business in to a partnership one. This will enable them get legal advices on basic legal aspects of business pertaining the partnership. They also need to understand that if the venture fails and already had borrowed some amount; it is their obligation to repay the debt. Assuming that they contributed capital equally, both partners need to consider that any external debt should be cleared first before settling any internal ones.

Both of them should also consider that sharing of profits should be according to the ratio of their contributions or any criteria that they deem fit. This will ensure that any issues or complications are handled the right way. In Ingran vs. Deere Ingram, who were a psychologist and Deere, who was a psychiatrist, entered into an agreement in which Deere could serve as a medical and director of a pain clinic. He said that he was going to receive a third of clinic’s income, and Ingram would receive a third, and the remaining one-third would be for meeting expenses. Deere said that they were to carry a joint venture but Ingram asserted that Deere will receive a third of the clinic’s revenue and that no agreement was reached on the remaining two thirds. He also admitted that he never contributed capital to start clinic, never took part in hiring extra workers, and never knew the names of staff members. He also admitted that he never bought clinic equipment, never became a signatory to the clinic’s ban account and never appeared anywhere in the lease agreement for the clinic office space.

After fourteen months, Ingram decided to give Deere a form called Physician Contractual Employment Agreement’ (stated that Ingram was to be the sole owner of the clinic) which he refused to sign. He later ceased working at the clinic. He sued Ingram, and later on the jury discovered that both of them entered into a partnership agreement in which Ingram breached his fiduciary responsibility to Deere. However, the trial court found that they found no material evidence to support their partnership business. With this case law, Amanda and John should ensure that they communicate to each other, not only orally, but also in writing the responsibilities of each partner, compensation of each partner and profit sharing ratios in order to avoid complications.

Forming a capital at start up stage is not realistic, as the company requires that the two partners raise a large amount of money, and both of them should have sufficient collateral incase that go for a bank loan. By the look of things, it appears that they will not get additional financing because they were not able to raise $150000, which is a very small fraction for the capital required to form a company. Besides, the issue of Amanda not able to settle her trustee obligations to the family proofs that they will not be able to secure a bank loan in order to establish private company. Most start ups must be operated as partnership businesses for at least three years from the time they were formed and that during this time the income inflows should have been consistent and rising. They should first be able to raise the additional $ 90000, carry out the business as partnership and when they think that the business is now stable they can decide to make it a private company.

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