Legal Position of JCI Ltd regarding Unauthorize Contract by Ex-Employee

To advise JCI Ltd regarding their legal position for an intentional misrepresentation of one of its ex-employees who entered into a contract with another company after being terminated.

Under the Common law of contract, a person can only enter into a legally binding contract on behalf of another when such person has the rightful authority. It falls under the scope of capacity of a person to enter into an agreement. It is one of the essential requisites of a valid contract (Adriaanse, 2016). A person under a service of employment has the authority to act as per directed in the course of employment. Such employee can enter into a contract for the purpose and on behalf of the company he is working with. Contracts entered with another company in the course of such employment are valid and enforceable. While, a terminated employee has no authority to enter into any contract for or on behalf of such company that terminated him. In doing so, the person would be misrepresenting himself about the position which he no longer possesses.

A company that is falsely represented by an employee recently terminated can defend itself by stating the fact of the lack of authorization of the terminated employee to sign a contractual deal on behalf of the company. The company can take the defence of ‘misleading or deceptive conduct’ of the person who entered in the contract on its behalf. Section 18 of the Competition and Consumer Act (Cth) (CCA) lays down the provision for deceptive contracts entered into by a person purposely to deceive or mislead (“Contracts & agreements”, 2018).

The concept of misrepresentation under Common Law overlaps the statutory provision of deceptive and misleading conduct, and it the common law only applies to cases where CCA is not relevant, which is generally non-commercial matters. While, in commercial cases, contractual misrepresentation takes places when a party or its agent makes false representation, either in writing, orally or in conduct. The false representation is materially of fact and not a prediction or an opinion of law made by the person so deceiving. The person making such false representation must have a purpose to induce the other party in favour of the contract. In such case, the aggrieved party or the party on whose behalf the contract is entered into can seek rescission of the contract. Provided that, the contract so formed has the scope of restitution, otherwise it would lose its right to rescind.

Statutory and Common Law Provision for Misrepresentation in Contract

The party on whose behalf an unauthorized agent or employee has entered into the contract has the right to defend it by stating the provisions of statutory illegality that can rule out such contract. Statutory illegality refers to the contracts that are declared to be void ab initio by a relevant statute.

In this case, Kruger, the terminated employee of JCI signed a contract with Anglo-American Corp Ltd for a certain supply of smelter. Kruger made Anglo-American Corp Ltd sign the contract when he was fired by JCI, which signifies that he had no authority to do the act. However, he did so purposely for injuring his company’s goodwill as it terminated him. Therefore, this situation has landed JCI into an unnecessary complexity of performing a contract that it did not entered into, as a contract entered into by a terminated employee is considered null and void.

In this situation, JCI Ltd has the option to plead innocent in front of the court and state that it bears no liability to perform the contract formed by a terminated employee, which was out of his authority. JCI should highlight the essential requisites of a valid agreement to Anglo-American Corp Ltd as the contract lacks certain essentials like consent of the parties, legality of the contract, capacity of the parties, etcetera.

Citing the provisions of CCA, JCI Ltd can claim no liability for a deceptive and misleading conduct of its employee pertaining to the unlawful contract.  JCI Ltd can pray for rescission of the contract.

Conclusion

The contract so formed by Kruger without authorization would be set aside by the court, relieving the liabilities of JCI regarding the performance of the contract.References

Adriaanse, M. J. (2016). Construction contract law. Macmillan International Higher Education.

Contracts & agreements. (2018). Retrieved from https://www.accc.gov.au/consumers/contracts-agreements

To advise Ringo regarding the remedies available to him for the misconduct of the other shareholders towards him and the company as a whole.

Under the Corporations Act 2001 (Cth) or CA, for passing a resolution, ordinary or special, the company must give a 21 days’ notice to the shareholders (“Corporations Act 2001”, 2018). Such notice must include the date, time and location of the meeting, the agenda of the meeting and information about a proposed resolution. For passing an ordinary resolution, which is not specified in the CA, a simple majority is required, which is normally more 50% of the votes in favour of the motion. Failing to comply with the norms may attract civil penalties to the directors under section 1317E of the Act.

Remedies Available to JCI Ltd for Unauthorized Contract

On the other hand, Special resolution requires special criteria even before they are voted on or passed under the CA. A mandatory notice is required to be served to the shareholders, irrespective of the fact that all of them finally cast their votes or not (“Passing a company resolution | ASIC – Australian Securities and Investments Commission”, 2018). The notice of meeting for passing such special resolution must expressly state the intention or agenda of passing the special resolution and a detailed discussion of its content. A special resolution require at least 75% of the votes in its favour to be passed (Maxwell, 2018). Actions like changing a company’s name, constitution, type of business, liquidation requires passing of a special resolution. Section 1317E of CA prescribes the penalty for the breach of the provisions for passing of such special resolution.

However, section 248G of the CA holds the fact that a resolution must be passed by a majority of the votes cast by the shareholders entitled to vote for passing the resolution. This provision does not specify the resolution as ordinary or special. While section 248F specifies the quorum to hold a director’s meeting. While Section 249J asks the directors to give notice to all shareholders for holding general board meetings.

Section 136 of the CA lays down the right of a company to add or alter its constitution by way of special resolution. Such alteration will not be effective unless the other criteria laid down in the constitution pertaining to such alteration is fulfilled. Section 140 of the Act states that the alteration of the constitution would have an effect between the company and its directors, members, company secretary and between members (“Constitution and replaceable rules | ASIC – Australian Securities and Investments Commission”, 2018).

Section 191 of the Act holds a director liable to notify others about any of his personal interest arising out of the company.

Section 1317E states the civil penalties that a court awards in case of breach of provisions such as the appropriate way of passing a special resolution, director’s duties and non-disclosure of personal gains derived from the company. A pecuniary penalty up to $200000 may be ordered by the court if the directors or any officer is held guilty for the above-mentioned reasons.  While under section 206C, the court may disqualify a person from managing a corporation on the advice of ASIC, if it is found that they have failed to comply with the prescribed provisions of the Corporations Act 2001 (Cth) (“Corporations Act 2001”, 2018).

In this case, an ordinary resolution was passed to change the logo of the company without giving notice to Ringo who holds 30% of the shares. This would not attract any penalty to the other directors or shareholders as it is above the required threshold of 50%. Therefore, John, Paul and George would not be liable for passing the ordinary resolution without giving notice to Ringo.

While, John, Paul and George would be held liable for passing a special resolution without informing Ringo as such resolution was not passed by the 75% of the shareholder as John and Paul holds 30% each and George holds 10% of the shareholding which adds up to 70%. Therefore, Ringo can sue the other directors for passing such resolution without his knowledge.

In addition to, Ringo can bring civil as well as criminal charges for misusing the company fund for personal benefit, which is unethical and illegal, and contravenes the duties of a director mentioned under section 181 of the CA. Additional charges can be brought against John and Paul for not taking necessary steps against George when such information was conveyed.

Civil penalties would be ordered by the court against John, Paul and George for breaching their duties as a director toward Ringo and the company as a whole under the Corporations Act 2001, which may extend up to $200000.

Conclusion

Ringo would be liable to receive damages from the other directors for breaching their duties toward him and the company as a whole. Additionally, the John, Paul and George could be disqualified by the court for their misconduct.

References

Constitution and replaceable rules | ASIC – Australian Securities and Investments Commission. (2018). Retrieved from https://asic.gov.au/for-business/registering-a-company/steps-to-register-a-company/constitution-and-replaceable-rules/

Corporations Act 2001. (2018). Retrieved from https://www.legislation.gov.au/Details/C2017C00328/Html/Volume_1#_Toc494807430

Maxwell, C. (2018). Shareholder resolutions: Is there a case for change?. Governance Directions, 70(6), 341.

Passing a company resolution | ASIC – Australian Securities and Investments Commission. (2018). Retrieved from https://asic.gov.au/for-business/changes-to-your-company/passing-a-company-resolution/