Sample Response to a Problem Question
(this student received a mark of 26 out of 30)
This response identifies the legal issues and states the
relevant law, both case law and statute law, and applies
these laws to the key facts.
The legal reasoning involves the interweaving of the law
with the facts, with the student applying the relevant law
to the key facts in the case study.
This has been done very effectively and is assisted by
the regular use of linking words and phrases (please
note that these linking words and phrases have been
italicized).
As a result, this assignment flows fluently and logically,
with the legal arguments being presented very clearly.
In addition, relevant case law and statute law are
integrated successfully into the discussion to support
the student’s legal arguments.
Notice too, how the student shows the relationship
between case law and statute law.
The very point of establishing a company is to carry out business
ventures. To do this requires the company to enter into contracts with
outsiders. Because a company is an artificial entity it must be
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represented by individuals. The legal question which must be
addressed is who in the company is able to enter into these contracts
on its behalf? To answer this question, one of two theories needs to
be applied, the organic theory or the law of agency.
This introduction signals the main issue of the question which is : who in
the company is able to enter into contracts on its behalf?
The student also signals the two relevant areas of law which relate to this
issue, organic theory and law of agency.
The organic theory involves the company carrying out business in its
own name. A company is divided into two parts or organs those
being, the board of directors and the general meeting of members.
The board of directors has a lot of power relating to the management
of the company and their actions or state of mind are considered to
be the actions or state of mind of the company itself. Similarly, the
actions or state of mind of the members in general meetings are
considered to be the actions of the company. However it is unlikely
for outsiders to deal directly with either of the two parties stated
above. Instead, agents or employees are able to deal with outside
parties on a company's behalf and under s126 the company is able to
be bound by the acts of those agents in the same way as natural
persons. In such cases, the law of agency comes into play. However
the law recognises that the organs of the company are more than
mere agents. The organs are said to be directing the mind and will of
the company.
The student outlines the important aspects of the two relevant areas of
law and indicates how they apply to the main issue of the question.
Notice the effective use of linking words and phrases: ‘Similarly’,
‘However’, ‘Instead’, ‘In such cases…’. These linking words and phrases
connect the student’s ideas together and provide a logical flow to the
discussion.
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In this instance, Annie is not an agent but rather a director of the
board of Positive Computer Games Ltd. (refers to facts in question)
The law states that 'an individual director does not have customary
authority to bind the company in contract with outsider. Dawson J
stated in Northside Developments Pty Ltd v Registrar-General (1990)
8 ACLC 611 that 'The position of director does not carry with it an
ostensible authority to act on behalf of the company. Directors can
act only collectively as a board and the function of an individual
director is to participate in decisions of the board. In the absence of
some representation made by the company, a director has no
ostensible authority to bind it.'
student states relevant law in relation to director’s authority to bind
company to a contract, citing decision from a case as authority to support
argument
In this case study, Annie entered into the contract with Funky Games
Pty Ltd by herself as an individual director and as such she has no
ostensible authority to do so. Rather the board as a collective must
reach an agreement prior to entering into a contract with outsiders. In
this case, the board of directors of Positive Computer Games Ltd did
not, as a collective, enter into the contract with Funky Games Pty Ltd.
Only Annie did. Annie was not formally appointed to the position of
managing director by the board allowed under s201J, nor were any
specific management powers delegated to her under sl98D.
student applies law to the facts (including statute law) and develops a legal
argument
This means that she acted beyond the scope of her powers
(conclusion)
Notice again how student uses linking phrases to develop a
coherent argument, for example, ‘In this instance…’.’The law
states…’, ‘In this case study…’, ‘In this case…’, ‘This means…’
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However, even though the customary authority of individual director is
limited 'they will bind the company if they have actual authority or
been held out as having greater authority than is customary for
individual directors.’ (relevant law stated)
In applying this to the facts, (clear signalling of application of case
authority to facts) even though Annie did not have actual authority, the
question must be considered as to whether Annie was held or
represented by the company as having greater authority than was
normal for an individual director. To answer this question, it is useful
to analyse the case of Freeman and Lockyer v Buckhurst Park
Properties (Mangal) Ltd (1964) 2 QB 480. (student applies law to facts,
citing a relevant case as authority to support legal reasoning. The
discussion of this case and its relevance to the facts in the question are
clearly signalled by the phrase ‘To answer this question, it is useful to
analyse the case of …’ )
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In this case, Kapoor and Hoon formed a company for the purpose of
developing a property. They and two other candidates formed the
board of directors and both Kapoor and Hoon held half the issued
shares. Kapoor acted as the Managing director although he was not
formally appointed, however, he had the approval of the board to act
in such a position. The issue arose when Kapoor entered into a
contract.with a firm of architects and surveyors and refused to pay
them for their services they performed.(facts of case)
It was held by the court that the company had held out Kapoor to be
its managing director and, as such, they were bound by his actions
(decision).
Kapoor in this instance had apparent authority to hire the firm of
architects and surveyors, as this was the customary authority of a
managing director. As such, the outsiders relied on the apparent
authority of the managing director to assume that Kapoor was acting
within his scope of authority. The important fact in this case is that,
even though the board had made no formal decision to make Kapoor
their managing director, the representation arose due to the fact that
they failed to prevent him from acting as if he was the company's
managing director (legal reasoning supporting decision).
This is an excellent example of a case summary which is integrated very
effectively into the discussion.
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Applying this reasoning to Annie, although it is stated that she is a
director, her actions are those of a managing director. Therefore, it
can be stated that Annie like Kapoor was held by the company,
Positive Computer Games Ltd., to be its managing director even
though the board had not made any decision to that effect or
prevented her from assuming the role as managing director. As a
result of this, Funky Games Pty Ltd is able to argue that they relied
upon the apparent authority Annie exercised as the managing
director. As such, this would make Positive Computer Games Ltd
bound to the contract with Funky Games Pty Ltd.
(student cites details of relevant case to support legal argument,
applying the decision and reasoning of the case to this particular case
study and comes to a conclusion. Note again, the effective use of
linking phrases and words: ‘Applying this reasoning…’, ‘Therefore…’,
‘As a result of this…’, ‘As such’.)
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However, the issue as to whether Positive Computer Games Ltd is
bound to the contract with Funky Games Pty Ltd requires further
deliberation (legal issue).
Historically a company's object clause was the most important part of
a company's constitution. . 'Any contract or transaction by a company
that was not within the scope of one of its objects was referred to as
ultra vires or beyond the power of the company' therefore, any
contracts entered into with outsiders were void. Coupled with the
doctrine of ultra vires is the doctrine of constructive notice. This
doctrine protected corporations as it states that outsiders were to be
aware of a company's objects as they were set out in its constitution
and lodged with ASIC.and therefore available to the public. Basically
what this means is that the company was not bound by the acts of the
agent if their actions were beyond their authority, because the third
party should have had knowledge of the company’s constitution.
(discussion of relevant law –again the student uses linking words and
phrases effectively to connect ideas together; for example, ‘therefore’,
‘Coupled with…’, ‘Basically what this means is… )
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Taking these two doctrines into account (signalling the application of
the law to the facts), Annie did enter into a contract that was not within
the scope of the objects clause as the computer games she
purchased were violent and not genuine and thus not suitable for
PCG's clientele (application of law to facts).
However, the doctrine of ultra vires has now been abolished and
under s 125(2) 'an act is not invalid merely because it is contrary to or
beyond any of its objects.' (relevant law stated again, including statute
law) This means that under this section, PCG is still bound to the
contract entered into with Funky Games Pty Ltd even though Annie’s
actions were contrary to the objects clause (application of law to facts).
Furthermore, the doctrine of constructive notice has too been
abolished by s130 (relevant statute law stated) Section l30 (1) states
that a third party, in this case, Funky Games Pty Ltd, is not assumed
to have knowledge of the company's constitution. What this means
is Funky Games Pty Ltd is not presumed to have known that Annie
did not comply with the constitution and breached clause 6 in
particular, as they do not need to know what the company’s
constitution states. (application of law to facts).
Also, under s129 (1), a third party is able to assume that there has
been compliance with a company's constitution. (relevant statute law
stated) Therefore, Funky Games is able to think that Annie has
complied with the constitution (application of law to facts).
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The other issue which is raised is the fact that David went away on
holiday and, as a result, Eddie sold the CDs to Annie. The question
which stems from this is whether the knowledge David possessed is
the knowledge of Funky Games Pty Ltd (legal issue stated).
The answer to this question is yes. Bray CJ, in the case of Brambles
Holdings Ltd v Carey (1976) 2 ACLR 176 stated that '. . . it is a fallacy
to say that any state of mind to attributed to a corporation must
always be the state of mind of one particular officer alone and that the
corporation can never know or believe more than that one man
knows or believes. This cannot be so when it is a case of successive
holders of the office in question or of the holder of the office and his
deputy or substitute during his absence.’ (statement of relevant law
drawing on judge’s decision and reasoning).
According to this judgement, even though Eddie was not aware of
Positive Computer Games constitution, the fact that David did means
that their corporation, Funky Games Pty Ltd also knew about that
information (application of law to facts)
This would mean that Positive Computer Games is not bound by the
contract entered into with Funky Games Pty Ltd.(conclusion)
Finally, the likely outcome in this case study is that Positive
Computers Games Ltd would not be bound by the contract that they
entered into with Funky Games Pty Ltd. This is based on the fact that
David had read PCG's constitution and therefore possessed the
knowledge that Annie breached her company's constitution by buying
the software. However had David not read PCG's constitution PCG
would be bound to the contract entered into with "Funky" because
"Funky" could argue that they relied upon the apparent authority that
Annie possessed as a managing director (overall conclusion is reached,
by applying legal reasoning to facts).
In this case study, it is not stated that the board of PCG appointed
Annie to the position of managing director, however, she is a person
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with whom Cash Supply Ltd arranges the loan. Therefore, it can be
assumed that she is the managing director but whose appointment
was defective in the sense that she was not actually appointed by the
board (application of law to facts).
This occurred in the case of Freeman and Lockyer v Buckhurst Park
Properties (Mangal) Ltd (1964) 2 QB 480. In this case, Kapoor, one of
the directors, acted as the managing director with the approval of the
board, although like Annie, he had not been formally appointed. In
this case, Kapoor hired a firm of architects and surveyors on behalf of
the company but refused to pay for their services. It was held by the
court that Kapoor was considered by the company to be its managing
director and therefore bound by his actions. Kapoor had apparent
authority to employ the firm of architects as this was within the
customary authority of a managing director. Consequently, the
outsiders did not have to study the company's'constitution because
they relied on Kapoor's apparent authority (student uses case as
authority to support legal reasoning)
In this particular case study, it can be said that PCG Ltd represented
Annie to have the authority to enter into the contract with Cash
Supply Ltd on the grounds that the board failed to prevent Annie from
acting as managing director even though the board had made no
formal decision about her appointment. This is the same conclusion
that was reached in Freeman and Lockyer v Buckhurst Park
Properties (Mangal) (1964) 2 QB 480. As a consequence, PCG would
be bound by Annie's actions because Cash Supply Ltd would have
relied upon her apparent authority (application of law to facts, drawing
on case authority to support legal reasoning and conclusion).
The bibliography has been included below.
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Notice how the bibliographical details are set out, with family name first,
and in alphabetical order.
Also, the student has only used three texts.
When answering problem questions, extensive research is not required
because you are focusing on applying the case law and statute law to the
key facts in the question.
Whereas, with research essay assignments, the expectation is that you will
read widely and draw on a range of ideas and information, to support your
discussion of legal concepts.
Bibliography:
Ford, H A & Austin, R P & Ramsay I M, 1997, Ford's Principles of
Corporations
Law, 8th ed., Butterworths, Australia.
Hanrahan, P & Ramsay, I & Stapledon, G, 2002, Commercial
Applications of
Company Law, 4th ed., CCH Australia, Sydney.
Lipton, P & Herzberg, A, 2000, Understanding Company Law, 9th ed.,
LBC
Information Services, Pyrmont NSW.
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