Establishing the Business Structure and Liability for Damages
1 (a) – Partnership is known as relationship which is established by two persons with a common view to earn profit by carrying on their business. In this structure, two or more persons are involved and they enter into a legally binding contract. In partnership relationship established between the parties is contractual in nature. In Melbourne, provisions of partnership act 1958 are applicable for the purpose of carrying on a business in partnership. Definition of partnership is defined by section 5 of the Partnership Act 1958, and as per this section if any relationship established between two or more persons with a common view to earn profit by carrying on a business, and this section also includes the limited partnership as per the meaning stated in part 5.
There is one case Green v Beesley (1835) 2 Bing N C 108 at 112, and in this case Justice Tindal J stated that he considered the mutual participation for understanding the concept related to partnership, and he also stated that mutual participation is considered for existence of partnership even though no legal entity was created by participants. In case Smith v Anderson (1880) 15 Ch D 247 at 273, justice James LJ stated the meaning of ordinary partnership, and as per James LJ partnership exists, if there are some definite individuals who binds themselves under any legal contract for the purpose of carrying on a joint object, and they can carried on this object either for pleasure or for limited time. James further stated that it is necessary that these persons must enter into a contract with each other.
Persons entering into contract are limited and these limitations are there even after these definitions, which mean if all the traits of above definitions are there but still persona exceeding limited numbers, then it is not considered partnership.
However, law of partnership is derived from both case law and statute law. It must be noted that relationship of partnership also includes elements of special type of agency, and partners of the firm acting as agents for each other. Some important aspects of partnership are stated below:
- Person must carry on business.
- In common, and
- The main purposes of persons are earning profit.
It must be noted that for the existence of partnership all these factors must be present, and if any element is missing then there is no relationship of partnership exists. Section 6 of the Partnership Act 1958 defines the rules which help in determining the existence of partnership:
- Sharing of return cannot justify the relationship of partnership between two persons. In other words, sharing of gross returns generated from any joint or common interest of any property is justify the relationship of partnership, and if there is no joint or common interest then such relationship is not considered as partnership.
- The receipt of profit on sharing basis is considered as prima facie evidence for deciding the existence of partnership between the persons, but such receipt is considered partnership if it is contingent in nature or varying as per the profit of the business.
In this case, all three persons named as Mary, Fred, and Chris are starting their café, and for this purpose they entered into an agreement in which they write down some simple rules. They decided that they actively participate in the business, and also contribute equal money in the business and shares equal profit. In this case all necessary elements of partnership are present such as they are carrying on the business with a common view to earn profit. Therefore, it is clear that they are conducting partnership because they are carrying on the business with a common view to earn profit and all these traits are present in partnership only.
Choosing the Appropriate Business Structure
b- Definition of negligence and other are definitions are stated by section 43 of the Wrongs Act 1958, and as per this section negligence occurred when person fails to take reasonable care, damages includes those damages which stand for monetary compensation in any form. This section further stated the meaning of harm which states that harm includes injury or death, damage to property, and economic loss, and injury means personal or body injury.
As per section 44 of the wrongs Act 1958 defines the application, which means that part of this Act include those claims which are filed under tort of negligence.
In case defendant owns any duty of care towards the plaintiff and breach that duty then plaintiff has right to take action against the defendant under tort of negligence. However, for taking any action it is necessary that plaintiff suffers injury or damage because of such breach of duty be defendant. On usual basis, three elements must be satisfied for filing claim under tort of negligence, and these elements are duty of care owned by defendant towards the plaintiff, breach of such duty by defendant, and injury caused to plaintiff. In other words, negligence is determines as act result from carelessness of person. However, not all acts of carelessness results in liability and only those impose liability which satisfies the three elements stated above.
As per Section 48 of the wrongs Act 1958 person is liable for negligence in case risk related to the case is foreseeable in nature, risk must not be insignificant, and any reasonable person in similar situation takes those precautions in similar situation.
This section also stated that court determine some factors for deciding whether reasonable person would have taken precautions or not and these factors are stated below:
- Probability related to occurrence of harm in case person fails to take care, and also the seriousness of harm.
- Burden imposed on person by law for the purpose of taking precautions for avoiding such risk, and
- Social utilization of the activity which cause risk of harm.
As per section 50 of the Wrongs Act 1958, in case defendant owns duty of care then it is the responsibility of defendant that he warns plaintiff related to risk of harm or also provide him necessary information related to risk of harm, and if defendant fulfills this responsibility then he is satisfying the duty of care towards the plaintiff.
According to Section 51 of the Act, following factors are determined by Court for the purpose of determining the harm caused by negligence, and these factors are stated below:
- Factual causations, which determines whether negligence caused by defendant is necessary condition for damage or injury or not.
- Scope of liability, which means Court considers whether it is right to extend the liability of negligent person to the harm caused.
In other words, Common law stated that if plaintiff wants to prove the liability of defendant under tort of negligence, then it is necessary that plaintiff proves that defendant own duty of care towards the plaintiff, defendant breach such duty of care he owned towards the plaintiff, and injury caused to plaintiff from such breach. From last few years, law stated the standard of care for determining the actions of person, and these actions are compared from such standard of care. These standards are established to ensure the protection of other people, and these standards are established by considering the actions of reasonable person in similar situations. After considering the facts and situations of the matter, Court determines the actions of reasonable person in similar situations.
Liability for Damages under Tort of Negligence
There is one case law which is considered as landmark case of tort of negligence, and this case is named as Donoghue v Stevenson 1932 AC 562. In this case sealed and opaque bottle of ginger-beer was purchased by Mrs. Donoghue, and bottle was sealed and she was not able to check the contents of bottle. She already consumed the one glass of beer, and later when she poured another glass there was decomposed snail in the beer. She stated that she suffered gastroenteritis and nervous shock, and she file claim under tort of negligence against the manufacturer of ginger beer that was Mr. Stevenson. In this case, House of Lords stated that the main issue which needs to entertain was whether Mrs. Donoghue can take file claim for negligence against the manufacturer. Court decided that product is ultimately consumed by the consumer, and therefore manufacturer owns the liability towards the consumer.
One more case is defined in this paper which relates with the liability of café in case of negligence, and this case is named as Stella Liebeck v. McDonald’s Restaurants (1994). In this case decision is given by the jury of 12 persons, and they applied the principle of comparative negligence in this case. After applying these principles Jury decided that McDonalds bear’s 80% liability and Lieback bears 20% liability because she is also contributes in the negligence. Jury further stated that Warning was given by the McDonalds by stated it on coffee cup but that warning was not clear and adequate to understand. Therefore, jury decided that US$200,000 in the form of compensatory damages, which was then reduced by 20% to $160,000, and on addition basis they award $2.7 million in the form of punitive damages to Lieback. Decision made by Jury was considered as appropriate decision because defendant is negligent on his part, and reasons for that are stated below:
- Duty of care was owned by defendant towards the plaintiff, and such duty is breached by the defendant by failing to take reasonable steps.
- Because of such breach injury was caused to plaintiff, and plaintiff suffered damages from such breach.
Jury also provides one more reason according to which adequate warning was not given by defendant to the plaintiff and also he fails to provide any other information. In other words, extreme hot coffee was served by defendant to plaintiff, and he also failed to provide warning to the plaintiff related to danger of hot coffee. Jury further stated that plaintiff can seek punitive damages also because risk related to coffee is in the knowledge of defendant but he fails to take any step to solve this problem, and also cause serious bur from such hot coffee.
In this case, all three partners purchase the products for their new café and they also purchase new Italian coffee machine which costs almost thousands of dollars, but this coffee machine was not worth for money because that coffee machine produced extremely hot coffee that after consuming this coffee one consumer suffer from second degree burn on her lips. This coffee was served and prepared by Chris and he fails to check the regulator of coffee machine before serving the coffee, and on general basis this regulator was set on medium temperature but because of the broken thermometer water produced by machine was boiling hot. When Chris served this coffee to the consumer it cause second degree burn to her and because of this burn she is not able to work for week.
Taking up a Loan as a Director of a Business
Therefore, in the present case consumer can sue the café on the basis of following reasons under tort of negligence:
- Duty of care was owned by Chris towards the consumer, and such duty is breached by the Chris by failing to take reasonable steps.
- Because of such breach injury was caused to consumer, and she suffered second degree burn from such breach.
There is one more reason according to which adequate warning was not given by Chris to the consumer and also he fails to provide any other information. In other words, extreme hot coffee was served by defendant to plaintiff, and he also failed to provide warning to the plaintiff related to danger of hot coffee.
2 (a) – Company is the form of structure which can be adopted at the time of growing stage of business. Under this structure numbers of benefits are provided to the owners such as they are considered separate legal entity in the eyes of law. In other words, same rights and liabilities are possessed by company as natural person possessed such as company can sue and be sued and company can incur debt. Owners of the company can limit their liability incurred at personal level, and for the debts of the company they are not liable at personal level. Some necessary elements of company are stated below:
- Company is considered as separate legal entity, and it also has advantage of limited liability of the owners.
- Company is considered as complex form of business structure, and for setting the company it involves higher administration cost as well as set up cost.
- In this business owners of the company must comply with regulations defined by stated Corporation Act 2001.
- Business operations of the company are conducted by directors of the company, and owners of the company are shareholders.
Generally two types of companies are incorporated in Australia, and these companies named as proprietary limited companies and public companies.
Public companies are those companies in which shares are issued by owners of the company to general public for the purpose of arranging funds in the company and these companies are either listed on Australian Stock Exchange.
Company has two most important factors and these factors are named as limited liability of the owners and separate legal entity, and as per these characteristics company is considered as separate legal entity which is different in the eyes of law from its shareholders and liability of shareholders is limited as up to the capital contributed by them in company. For understanding this it is necessary to determine the case law Salomon v Salomon & Co [1897] AC 22 (Salomon), House of Lords stated in this case that doctrine of legal entity was considered as two edge swords, and further stated that decision of considering the companies as separate legal entity was good. However it must be noted that this case shows all necessary factors related to company for making it the powerhouse of capitalism.
In this case, Mary, Fred and Chris manage their liability in much better way by converting the partnership into company and in this form of business structure they can also issue shares for arranging the funds for business operations.
b- Doctrine of Indoor Management: this doctrine was developed by corporate law and this doctrine is introduced to ensure the protection of outsiders, and legislature also ensures this protection by section 128 and 129 of Corporation Act 2001 because in this legislature adopted more convenience business approach. According to the previous law of corporate, if any outsider entered into a contract with any person who purported to act on company’s behalf, but in reality such person does not have any relevant authority to enter into such contract. In this case contract is voidable at the option of the company. This principle does not justify the rights of outsiders who entered into contract with the company in good faith, and if such outsider is not capable to check whether person fulfills the internal requirements of the company before entering into any contract. For resolving this issue new rule of indoor management was introduced by legislature in case Royal British Bank v Turquand case. This rule stated that board of directors of the company must provide actual authority to the agent, and for this purpose they must fulfill some procedural condition, and these conditions are stated below:
- It is necessary company’s Directors must appoint properly, and they convened Proper board meeting.
- It is necessary that quorum must be presented in the meeting for deciding anything.
- Proper information must be given to the board members.
This doctrine clearly states that if intention of outsider is good and he acted in good faith then he is not liable to check whether any internal requirements are fulfilled or not. All matter connected with internal management of the company but must not in the knowledge of public is covered under this doctrine. Application of this doctrine only applied on those matters which are connected with the internal management of the company.
According to section 128 of the Act, an outsider while deals with the company has power to make assumptions defined under section 129 of the Act, and company cannot use any defense which states that assumptions made by outsider are not correct.
According to section 129 of the Act, outsider has power to assume that any person who is appointed as agent or officer by the company, has been duly appointed and company must give him authority to act on behalf of the company.
In this case, all three friends are appointed as company’s directors, and after imposing liability on café Chris wants to do something good for the business, and decided to buy neighboring shop which is available for sale at $120,000, and for this purpose he decided to take loan for $150,000 for buying the shop and also arranging some money for renovation. As per the constitution of the company any contract related to goods and services which also include loan of $100,000 must be signed by the director of the company and another person authorized by the board for that purpose, but he fails to discuss this thing with the other directors of the company, and entered into contract.
In this, contract legally binds the business because there is no obligation on outsider to check the internal requirements under the IMR before entering into contract with the company. Therefore, company is legally bound by the contract.
c- in general way, directors bears the liability only towards the shareholders of the company, but in actual they are also liable towards the creditors and other members of the company as well, and because of this Act imposed various general and statutory duties on company’s directors, and these duties are stated below:
- Care and diligence- under this duty, directors are liable to exercise their powers and discharge their duties with due care and diligence, and this duty is fall under both the categories general duty as well as statutory duty. There are number of cases in which Court focus on directors duties while giving their decision, and these cases generally includes the issues related to financial transactions conducted by company. scope of this duty is extended by Court, and Court stated that director’s duty is breached if they enter into any transaction which is risky in nature and director’s does not take any reasonable action before entering into transaction.
Court further stated that breach of duty occurred in case director fails to inform the board related to any matter in which approval of board is compulsory.
This duty is defined in section 180 of the Act and as per this duty directors must exercise their power and discharge their duties with due care and diligence, and this care and diligence is considered by the actions of reasonable person if they hold any position either of director or officer of the company, and if they hold same responsibilities in the company as director or officer of the company. This section is considered as civil penalty provision under section 1317E.
- Good faith- This duty states that directors of the company must act in good faith and in best interest of the company, and take decisions for proper purpose. This duty is imposed so that directors must avoid conflict of interest, ad mange conflicts if any arise. Generally, this duty is known as duty of fidelity and recognized as fiduciary duties of directors, and this duty is imposed by both common law and Corporation Act 2001. This duty is defined under section 181 of the Corporation Act 2001, and as per this duty director or officer of the company exercise their powers and discharge their duties for a proper purpose, in good faith, and in the best interest of the company.
- Improper use of position- there is one more duty of directors that they did not use their position for any matter which is improper or for gaining advantage for themselves or for some other person, and this duty is stated under section 182 of the Act in which directors are instructed not to use their position in improper manner for the purpose of gaining advantage for themselves or for some other person which cause any detriment to the company.
In the present case, Chris breaches both duties stated under section 180 of the Act and section 182 of the act by not informing the directors about the information which require their approval and use his position in improper manner.
References:
ASIC, ‘Directors – What are my duties as a director’, < https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/directors-what-are-my-duties-as-a-director/#1>, Accessed on 26th May 2017.
Austlii, ‘Protecting Outsiders to Corporate Contracts in Australia’, < https://www.austlii.edu.au/au/journals/MurUEJL/2002/22.html>, Accessed on 24th May 2017.
Business, ‘Company’, < https://www.business.gov.au/Info/Plan-and-Start/Start-your-business/Business-structure/Business-structures-and-types/Company>, Accessed on 24th May 2017.
Corporation Act 2001- Sect 128.
Corporation Act 2001- Sect 129.
Corporation Act 2001- Sect 1317E.
Corporation Act 2001- Sect 180.
Corporation Act 2001- Sect 181.
Corporation Act 2001- Sect 182.
Donoghue v Stevenson 1932 AC 562
Green v Beesley (1835) 2 Bing N C 108 at 112.
Kevin G. cain, ‘The McDonald’s Coffee Lawsuit’, < https://www.jtexconsumerlaw.com/V11N1/Coffee.pdf>, Accessed on 26th May 2017.
Partnership Act 1958- Sect 5.
Partnership Act 1958- Sect 6.
Royal British Bank v Turquand.
Salomon v Salomon & Co [1897] AC 22.
Smith v Anderson (1880) 15 Ch D 247 at 273.
Stella Liebeck v. McDonald’s Restaurants (1994).
Wrongs Act 1958- Sect 43.
Wrongs Act 1958- Sect 44.
Wrongs Act 1958- Sect 48.
Wrongs Act 1958- Sect 50.
Wrongs Act 1958- Sect 51.
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