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L AW 5 2 0 6 C O R P O RAT I O N S L AW

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There is a valid contract between


Mac and Tapestry Galore

A contract is a meeting of minds between two persons whereby one binds himself, with
respect to the other, to give something or to render some service. A contract is a legally
binding or valid agreement between two parties. Under the Australian common law on contracts,
a contract is valid if the agreement contains all of the following elements:
1. offer and acceptance;
2. an intention between the parties to create binding relations;
3. consideration to be paid for the promise made;
4. legal capacity of the parties to act;
5. genuine consent of the parties; and
6. Legality of the agreement. (Fitzroy Legal Service. THE LAW HANDBOOK
(2010))1

All elements of a contract must be present in order for the contract to be valid. In this case, Mac
approaches Hugh and offers to sell him various carpets at a very low rate. After examining the
product, Hugh is impressed and asked Mac to supply $50000 worth of merchandise to the
business and he asks Mac to send the invoice to Tapestry Galore. Acceptance may be made
expressly or impliedly. The act of Hugh, on behalf of Tapestry Galore, in asking to supply the
merchandise to the business indicates his implied acceptance to the offer. Acceptance occurs
when the party answering the offer agrees to the offer by way of a statement or an act.
Consideration is the price paid for the promise of the other party. The consideration of the
contract is the $50000. The parties to the contract possess legal capacity to enter into contract
with each other. Consent to the contract was given freely and voluntarily. It does not appear from

the facts of the case the presence of duress, undue influence, mistake or false statement that
would invalidate the consent. And lastly, the agreement in the contract is not illegal.
Thus, since all the elements of a contract are present in this case, there is a valid contract
between Mac and Tapestry Galore.

Hugh exceeded his authority


In signing the contract
Every partner in

a partnership other

than

firm

that

is

a limited

partnership or incorporated limited partnership is an agent of the firm and of the


other partners for the purpose of the business of the partnership.XXX (Section 5 (1) of
Partnership Act 1892)2

The authority of a partner is limited to carrying on the business of the partnership in the
usual way and limited by a partnership agreement providing for restriction in the exercise of the
authority of a partner. Hugh, Elfriede and Winnie have a partnership agreement which notes that
the partners should not enter into any contract with Mac, because the partners believe that Mac is
not trustworthy. Since Hugh entered into a contract with Mac despite the existence of the
partnership agreement providing of such restriction, Hugh exceeded his authority as a partner.
However, the contract in this case remains valid because Mac had no knowledge of the existence
of the partnership agreement.

Under the Australian Partnership Act 1892, if there is an agreement between the partners
that any of them should not perform a particular act, an act done contrary to such agreement shall
not bind the partnership if the third party with whom the partner deal with had knowledge of the

partnership agreement.3 Thus, the restriction does not affect the right of Mac dealing with the
firm who did not know of the restriction and who believed that the person with whom he was
dealing was a partner. He is entitled to assume that the partner with whom he deals has a right to
participate in management, and therefore to bind the firm.

Hugh had apparent authority


to bind the partnership.
An apparent authority exist if the partner was carrying on in the usual way the business of the
partnership; the third party with whom the partner deal with knows him to be a partner and in
that capacity to be carrying on the business in the usual way; and the third party did not know
that the authority of the partner was in fact restricted.

Every partner is an agent of the firm and of the other partners for the purpose of the
business of the partnership; and the acts of every partner who does any act for carrying on in the
usual way business of the kind carried on by the firm of which the partner is a member, binds the
firm and the other partners, unless the partner so acting has in fact no authority to act for the firm
in the particular matter, and the person with whom the partner is dealing neither knows that the
partner has no authority, or does not know or believe the partner to be a partner. (Section 5 of
Partnership Act 1892)

In one case decided by the High Court, it said that even though actual authority be
lacking, the act of every partner who does any act for carrying on in the usual way business of
the kind carried on by the firm of which he is a member binds the firm and his partners unless the

other party either knows that he has no authority, or does not know or believe him to be a
partner. (Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985) 155 CLR 541)4

Even though Hugh has in fact no authority to enter into contract with Mac because of the
existence of a partnership agreement, it only binds Hugh, Elfriede and Winnie as parties to such
partnership agreement in the absence of any showing that Mac had actual knowledge of such
agreement. In this case, it is clear from the facts of the case that Mac had no knowledge of the
partnership agreement that any partner is not allowed to enter into contract with him. With that,
in entering into contract with Mac, Hugh had the apparent authority to bind Tapestry Galore.

1Fitzroy Legal

Service. (Last updated July 2010) THE LAW HANDBOOK. [Online] Available from:
http://www.lawhandbook.org.au/handbook/ch12s01s01.php [Accessed: 3rd December 2013]

2Australia.

Partnership Act 1892. Part 2, Division 2, Section 5 (1) Power of partner to bind firm

3Australia.

Partnership Act 1892. Part 2, Division 2, Section 8 (1) Effect of notice that firm will not be
bound by acts of partner

4Construction

Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985) 155 CLR 54; 58 ALR 411; 59 ALJR
393; BC8501129