Grounds for Voiding Contracts in Common Law, Statutory Law and Equity.
Over the past thirty years, the general trend in legal and economic policy in Britain, Australia and the United States has been away from socialism, state control and regulation and more toward laissez faire, free trade and free markets. Henry Bosch, former chair of the national Companies and Securities Commission, formed a working group in 1990 which issued a paper on Corporate Practices and Conduct (revised in 1993 and 1997) which attempted to improve self-regulation of business because of concerns about the underperformance and bad reputation of Australian businesses (Du Plessis et al, 2005, p. 91). For example, the Bosch Commission recommended that boards of directors take a more active role in supervising and evaluating the activities of managers, making clear to them what the standards are, who in turn had the responsibility of keeping the board informed. In addition, all companies should issue a Code of Ethics Du Plessis, et al, p. 99).
Of course, none of appears to have happened with Tim and Olivia and Sounds Ltd, which could be considered a conspicuous failure of self-regulation, or indeed as absence of self-regulation and a seemingly blissful unawareness of the law. As Ayres and Braithwaite noted, in the 1980s and 1990s Australia s Trade Practices Commission (TPC) began to move from being a legalistic enforcer to facilitator of deregulation and self-regulation (and law enforcer when these approaches fail) but that these changes were met with suspicion as being too soft on business interests, and by no means only on the Left side of the political spectrum (Ayres and Braithwaite, 1992, p. 15). John Farrar commented that in Australia, corporate law seems to be based on either Ned Kelly or his jailer. We love a larrikin but we are inclined to come down heavily on the tall poppies and to be excessively penal in our approach (Farrar, 2001, p. 6). In cases like those of Tim and Olivia, however, this may be the only appropriate policy since it appears they have violated a number of provisions of the criminal and civil code in a fairly short time, and may well have done so in the past. They may even have been aware of this fact, but at the very least they can expect a few lawsuits in the near future.
Several sections of the Australian Corporations Act on 2001, the Trade Practices Act of 1974 and the Civil Law (Wrongs) Act of 2002 are applicable to the case of Tim and Olivia and the sale of the Chinatown property to Kwok Ren under the aegis of ZZ Ltd. In addition to engaging an attorney, of course, Kwok Ren and associates would also be advised to contact the Australian Securities and Investments Commission (ASIC) and the Department of Public Prosecutions (DPP). Section 51 of the Trade Practices Act, for example, prohibits unconscionable conduct and Section 75 misleading and deceptive conduct or making false or misleading representations (Trade Practices Act 1974), as do sections 1308 and 1309 of the Corporations Act (CA). Fraudulent misrepresentation means one party to a contract knowingly made a claim without believing its truth, and Kwok Ren may benefit from the law of torts which hold that a fraudulent misrepresentation which does not become part of a contract may be sued in the tort of deceit , although in this case the deceit and misrepresentation was also part of the contract itself (Latimer, 2009, p. 207). These were not innocent misrepresentations for which they could sue under the tort of negligence. False representations of fact may be oral, written or made by conduct , while silence or telling half the truth and ignoring other important facts may be a misrepresentation of the total facts. If the falsehood actually induced the other party to sign the contract and they relied on the representation rather than their own judgment , the courts may void the contract and award damages. For example, Jolly Good Foods Pty Ltd v Rolex Pty Ltd (1984 and 1986) the plaintiff purchased the goodwill of a business because of fraudulent misrepresentations about the availability of a number of product lines and was awarded damages, as was the plaintiff in Crawford v. Parish (1991) who had purchased a burglar alarm franchise based of misrepresentations that there were no competitors in the market. In the latter case, the court also found the defendant in breach of the Trade Practices Act of 1974. In Veltese v. Kemp (2000) in South Australia, the courts awarded damages after a retaining wall collapsed because of the misrepresentations of the vendors that council approval had been given for the wall (Latimer, pp. 350-53).
Under section 46 of the Corporations Act there is also the question of whether ZZ is a subsidiary of Sounds Ltd since Tim and Olivia are on the boards of both and the board of Sounds was aware of their activities and approved them. Indeed, ZZ Ltd is their creation even though the board of their parent company wished to limits its exposure, although it is not clear whether they even informed the other Sounds board members of this quick turnaround or the profit they made. Nor were they acting honestly and in good faith with Kwok Ren and associates when they knowingly sold them a property which they were aware was worth far less than indicated in the original agreement (Corporations Act 2001).
If the courts determine that it is a subsidiary, then Sounds may be held equally liable for their actions and any civil, criminal or civil penalty actions that might arise. Sections 180-83 could be at issue, as well, especially the provisions requiring directors and corporate officers to act in good faith and for a proper purpose, and not to misuse information to gain an advantage for themselves or someone else or cause detriment to the corporation . According to s 182, misuse of an officer s position may result in both civil and criminal penalties depending upon the intent (Corporations Act 2001). Under s191 a director also has to notify other directors of material personal interest when conflict arises , although there Tim and Olivia probably did not make a full disclosure to their own board or to those they were doing business with. Section 6.1 of the Criminal Code also covers conflict of interest, and in fact, the majority of the provisions in the CA are criminal by virtue of s 1311, the general penalty provisions , with penalties ranging from a fine of up to 200,000 and five years imprisonment. In 1995-2005, the Australian Securities and Investments Commission and the Department of Public Prosecutions sent over 200 officers to goal for a period of over six months imprisonment. After the 1993 reforms, Civil Penalties Provisions are brought in a civil court, and can result in an unlimited compensation order (damages) a pecuniary penalty (up to 200,000) paid to the government a declaration and an officer s disqualification order. In Rich v. ASIC (2004) the High Court of Australia (HCA) found that the procedures to be applied in bringing a civil penalty case are more akin to a criminal case than a civil case , although ASIC can file criminal charges for breaches of sections 180-83. A legal action brought under common law for breach of equitable fiduciary duty may result only in a civil remedy , however, including damages, compensation and an accounting of the profits (Adams, 2005, p. 53).
There are a variety of court cases and legal precedents that may well apply to the various activities of Tim and Olivia. In Regal (Hastings) v. Gulliver (1967) the court found that the directors had acted in breach of their fiduciary duties when they took advantage of a business opportunity for their own benefit instead of on behalf of the company. In Green v. Bestobell Industries (1982) the court ruled that in conflicts of interest the officers should act in the best interests of the company and avoid personal benefits and in Hospital Products Ltd v United States Surgical Corp (1984) that directors always owe a fiduciary duty to those they could easily harm. In addition, under common law all officers are expected to act honestly and reasonably in their activities (Adams, pp. 47-48). Finally, the courts declared in R v. Byrnes and Hopwood (1995) that directors could not defend themselves on the basis that their actions were in the company s interests while motivated by an ulterior motive (for their own benefit) (Adams, p. 49). On the basis of all these statutes and precedents, then, Tim and Olivia had better obtain good legal representation for thy will be spending a great deal of time in court, and possibly in prison, which may well interfere with their other business dealings.
In question two, several other sections of the Corporations Act are relevant, particularly those in relation to companies not yet registered and those in administration or liquidation. Section 119 of the CA states that a company comes into existence on the day it is registered which Tim and Olivia had not yet done for Sydney Karaoke Ltd. Nevertheless, they signed a contract on behalf of this entity, purchased a neon sign for the new club and had the entrance painted, which indicates their intentions. Moreover, according to s 131 of the CA declares that if company officers enter into contracts before registration they are still bound to it if the company, or a company that is reasonably identifiable with it, is registered and ratifies the contract. In this case, the board of Sounds Ltd was probably aware of Tim and Olivia s purchase and agreed to it, which also makes them liable for nonperformance of their part of the contact. Section 131 continues that even if the company is not registered, or the company is registered but does not ratify the contract or enter into a substitute for it they are still liable to pay damages if it is not fulfilled, and Tim and Olivia had signed a contract whose terms had to be fulfilled by a certain date, which they failed to do (Corporations Act 2001).
For bankrupt or insolvent companies in administration or liquidation, sections 437 and 474 and 477 apply to this case. In s 437 A and B, the administrator acts as the company s agent and has control of the company s business, property and affairs and may carry on that business and manage that property and those affairs . Voluntary administration was introduced in the Australian Corporate Reform Act of 1992 and may be invoked by any company which is insolvent or likely to become so and does not involve application to the court. Its purpose was to maximise the possibility of saving the company and its business or to provide a better rate of return to creditors than under a liquidation (Tolmie, 2002, p 69). Evidently that was not possible in this instance, so under the provisions of s 474, liquidators appointed by the court take into his or her custody or under his or her own control all the property to which the company is or appears to be entitled. Liquidators may as the Court directs, bring, or may defend, any action or other legal proceeding that relates to that property or that is necessary to bring or defend for the purpose of effectually winding up the company and recovering its property. Sections 477 reiterates these powers and states that liquidators may carry on the business of the company so far as is necessary for the beneficial disposal or winding up of that business , may hire solicitors, and have the powers to sell all or any part of the company and bring or defend any legal proceedings in the name of and on behalf of the company (Corporations Act 2001). Therefore, the liquidator is the lawful agent of the bankrupt company and is also able to bring a lawsuit against Tim and Olivia for breach of contract. Even though their company was not yet registered, it still entered into a valid contract that must be fulfilled, and Sounds Ltd may also be liable for damages and compensation.
For the last two questions, the short answer is that Sounds Ltd is bound by the contracts they signed with various companies and if they break them they are liable to be sued for breach of contract in Australia or overseas or possibly both. In the first case, Tim in his capacity as de facto managing director signed a contract for 2 million over a two-year period with Audiophonics and in the second the Chief Financial Officer signed a contract with a New York company for 1.3 million. In both cases, the Board of Sounds was aware of these contracts and approved them, although now they are evidently having second thoughts about Tim and Olivia, and are rightfully worried about the legal and financial future of their company. Section 126 of the Corporations Act of 2001 provides that a company may be bound by contracts entered into by agents acting on behalf of the company with the company s express or implied authority. Tim and the CFO were agents of the company within these definitions of the law (Latimer, p. 332). Furthermore, the law of torts protects the rights of every person including the right not to have their business or economic interests injured, although in these cases the parties would most likely opt to sue in contract rather than in tort (Latimer, p. 208). By law, both of these contracts were valid agreements, duly offered and accepted. A written contract is evidence of a legally enforceable agreement (Latimer, p. 271). These offers were made by one party and accepted by the other, so there was a meeting of minds which any impartial bystander would have considered an agreement. Neither of the contracts was a preliminary or conditional agreement subject to further negotiations, nor were the offer and acceptance qualified in any way (Latimer, pp. 287-88). There were no counteroffers and the contract was communicated to the both parties with a prescribed method of acceptance, which was not qualified. Both parties were in full agreement and intended to be immediately bound by the contracts when they signed them (Latimer, pp. 294-97). Under the terms of executing consideration the contracts are in effect as soon as there is an exchange of promises to do something in the future , such as a promise to deliver goods or provide certain services in the future in return for a counter-promise to pay when these are delivered. Therefore, the contract is effective as soon as the promises are exchanged and can only be breached if the goods are not delivered or the agreed upon services are not performed (Latimer, p. 315). Even if there had been no formal, written contracts, promissory estoppal would have taken effect if the promissee has relied on the promise and would suffer some detriment if the promise went back on the promise (Latimer, p. 322).
Other legal escape clauses that might invalidate the contracts do not apply in these cases, at least so far is known from the evidence at hand. None of the parties to the contracts were minors, intoxicated or mentally ill when they were signed, which might invalidate them (Latimer, pp. 331-32). These agreements were not made under duress or because of undue influence, and none of the parties made a fundamental mistake about the terms, while all of them spoke English and were capable of understanding their provisions. Nor are the contracts void because the sellers have no goods or services to provide (Latimer, pp. 333, 336-38). There was no case of mistaken identity. A non est factum ( it is not my deed ) defense would be possible if a person has signed a document believing it to be something different from what it actually is. This could be caused by fraud or misrepresentation , although to make a case on that basis the document must be radically different from what it is in fact, and not just different in degree or have been misread because of a person s carelessness or negligence such as not taking reasonable precautions to determine the character of the document. Another possibility is that the person is disabled, ill, mentally incapacitated or unable to read and understand the contract, but it would be unlikely that people of full age and capacity could claim the defence (Latimer, pp. 343-44).
These contracts were not illegal under common law because they involved the commission of a crime, tort or fraud against a third party, promoted sexual immorality, prejudiced the due administration of justice, promoted corruption of public life, prejudiced the safety of the state, or carried out acts which were illegal under the law of a foreign and friendly state (Latimer, pp. 373-74). They were not void under common law because they aimed at restraint of trade and competition, or to out the jurisdiction of the courts , or prejudice the status of marriage , nor were they void by statute, such as the 1974 Trade Practices Act (Latimer, pp 275-77). Under common law, only those mistakes which affect the very existence of the contract will make a contract void , although if it is void in common law it will also be void in equity , as in cases when one person induces the mistake, or deliberately cloaks the mistake, or otherwise behaves unconscionably. Under statutory law, contracts are void if the mistake is caused by misleading or deceptive conduct , unconscionable conduct or false and misleading representation , as outlined above in Tim and Olivia s contract with Kwok Ren. Remedies include damages, cancellation, rectification of the contract (as in Solle v. Butcher and Taylor v. Johnson) and restitution, as in Ingram v. Little (Latimer, p. 345). None of this would apply in the third and fourth questions since there is no evidence that the contracts were null and void under common law, statute or equity, that the parties were incompetent or incapacitated in some manner, or that the documents must be rectified because any of the parties misunderstood them for some reason or they were recorded incorrectly.
Unconscionably conduct involves the stronger party in a contract taking advantage of the disadvantages of a weaker party, and such contracts are null and void by statute, equity and common law. One basic assumption in the law of contracts is that the contracting parties must meet as equals and the courts are now increasingly going beyond the proposition that a person is bound to the bargain if it can be shown that one party has taken advantage of the other . Duress, undue influence, failure of consideration, misleading or deceptive conduct, and false representations are all possible grounds for voiding unconscionable contracts. Even so, not every unfair transaction is unconscionable and there is no unconscionable conduct if you enter into an agreement or contract with your eyes wide open and it later turns out to be a hard bargain. To be considered unconscionable conduct, the stronger party must be shown to have taken unfair advantage of someone because of age, sex, illness, disability, inability to speak English, impaired faculties, ignorance, illiteracy or poverty. In such cases, the courts will void the contracts (Latimer, pp. 358-60). Between businesses, grounds for unconscionable conduct would include acting in bad faith, nondisclosure of information or conduct that might adversely affect the other party s business, noncompliance with the industry code of conduct, or misleading or deceptive actions under the Trade Practices Act (Latimer, pp. 365-66).
In answering the four questions, then, only the contract described in the first question is null and void under common law, statute and equity, while those in the other three examples are valid and legal agreements. In the first example, Tim and Olivia are not only open to a lawsuit, but also to possible criminal prosecution because o their actions. In the other three examples, they are open to lawsuits for breach of contract if they attempt to break these agreements, for they have no grounds in equity, common law or statutory law to do so. As discussed in the essay, there are many grounds for voiding or rewriting contracts and for the award of damages and restitution, but the latter three examples offer no such grounds, at least from the evidence given.
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