Revision Questions

Question 1

Indira decides to set up an Indian restaurant in Richmond. She negotiates with Sharky, the
managing director of Superworld Pty Ltd to buy a restaurant in a shopping centre.

Sharky tells Indira that the restaurant has a seating capacity of 148 persons. He also tells her
that the council intends to grant a permit allowing the restaurant to trade on Sunday. Indira,
being a trusting person, accepts Sharky’s assurances.

Before Indira signs the contract, Sharky learns that the council has rejected the Sunday
trading application. He fails to inform Indira.

The contract, signed by Indira, contains a number of clauses including the following
provisions:

“21.No representations made by Superworld Pty Ltd, its servants or agents are
binding on it and this document constitutes the whole of the agreement
between the parties.

22. No representation is made with respect to the seating capacity of the

Indira signed this document without reading clauses 21 and 22. She subsequently found that
the restaurant was only licensed to seat 80 persons.

Because of this, and the ban on Sunday trading, her takings were considerably below what
she expected. When she complained to Sharky he referred her to the written contract.

Advise Indira whether she is bound by the contract.

Question 2

Choco Ltd (Choco) owns and operates a chocolate factory which manufactures a specialty
line of premium chocolates. After several years of operation, the motor that spins its largest
chocolate vat required an increasing amount of maintenance. Choco decided it was time to
replace the motor with a new one.

Choco contacted Grand Motors Pty Ltd (Grand) regarding the installation of a new motor.
Grand advised that the installation and necessary testing would take five days. Choco agreed,
but stressed that it was important that it does not take any longer than that because with the
main vat idle the factory would be forced to stop all production. It also said that any longer
delay would jeopardise some contracts it had signed, including a $50,000 contract with the
Hilton Hotel to produce a line of chocolates for the forthcoming Easter period.

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Grand took exactly five days to install and test the new motor. However, due to the failure of
Grand’s mechanic to properly tighten certain bolts, the motor ran unevenly and spun the vat
out of alignment which eventually caused the motor to burn out. The batch of chocolate in the
vat at the time were not properly mixed and had to be dumped, at a cost of $10,000. A
replacement motor took two weeks to arrive from overseas, and be fitted and tested, at a cost
of $5,000. This delay resulted in the factory being closed down. As a result, Choco lost
profits from its regular products in the amount of $200,000. It also lost the $50,000 contract
with the Hilton Hotel because the delay caused a backlog and resulted in Choco not having
sufficient time to make the chocolates in time for Easter.

Advise Choco in relation to any amounts it might recover from Grand, stating the applicable
legal principles and citing relevant cases.

Question 3

David, Roger and Brown set up a land development company called DRB Developments Pty
Ltd. Brown is a solicitor by training and the constitution of DRB Developments Pty Ltd
nominates that Brown will be the company solicitor for any land purchases or sales made by
the company. The company’s constitution further provide that any disputes which arise
between the company and its members should be first referred to an arbitrator before there
are any court proceedings.

After a number of years, David and Roger meet another solicitor who they think is more
efficient than Brown. They want to appoint him as DRB Developments Pty Ltd’s solicitor in
place of Brown.

Brown is upset about this decision and intends to bring legal proceedings against DRB
Developments Pty Ltd over the matter. Advise the company as to their legal position.

Question 4

Fass is a director of Port Hotels Ltd. He is also a director and controlling shareholder of
Builder Pty Ltd, a construction company.

Fass convinces the board of Port Hotels that the company could improve its position by
renovating and expanding one of its major tourist resorts, and, indeed, his proposal is
reasonable given the tourism prospects in the area. The expansion programme, however,
would require council approval.

Fass obtains plans and a written quote for the expansion work from Builder for $2m. He
obtains quotes from other companies which far exceed the quote from Builder, because the
quote from Builder is well below the cost of the project.

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The directors of Port Hotels are convinced as a result of Fass’s representations that the
application will be approved by the council and they sign the contract with Builder. The
terms of the contract with Builder require an advance payment of $500,000. Builder
commences building work prior to council approval and demands a progress payment of a
further $500,000, which is duly paid.

The council does not grant approval because the site is environmentally sensitive. Builder has
an issued capital of $2 and no capacity to complete the project anyway. The advanced
payments have been used to pay other debts of Builder and the work done on site was minor
demolition. Port Hotels has now paid $1m to Builder, has partly demolished premises and no
council approval for construction. Builder is being wound up.

The directors of Port Hotels seek your advice. Would the other directors infringe any
provision of the Corporations Act 2001?

Question 5

Tasman Pty Ltd is a large proprietary company that builds multi-storey apartment
developments in Victoria. It has annual revenue of nearly $20 million. The company has
appointed 5 directors, including Roxanne as managing director. Roxanne engages Ann, an
architect who specialises in sustainable developments, to draw up plans for a new building
development, valued at over $7 million, utilising environmentally friendly materials and
products. Ann charges a professional fee of $150,000. A written contract is drawn up and
signed by both Ann and Roxanne for this fee. Having completed the plans in accordance with
the instructions provided by Roxanne, Ann sends her invoice to Tasman Pty Ltd but it has
now refuse to pay the $150,000 professional fee.

Tasman Pty Ltd disputes the invoice on the grounds that it never authorised the drawing up of
architecture plans. Furthermore, the constitution of Tasman Pty Ltd provides that Tasman Pty
Ltd is precluded from entering into any contract in excess of $100,000 without a directors’
resolution. Tasman Pty Ltd further claims that Roxanne has no authority to instruct Ann on
the procurement of the development plans drawn up by Ann. It has also now been discovered
that Roxanne appointment as managing director is defective for non-compliance with a
provision of the constitution. Ann was not aware of this until now.

Is Ann entitled to be paid under the contract?

Question 6

Harry, Irene and Henry are the directors and shareholders of Tomb Raider Pty Ltd. Tomb
Raider are a swimming pool construction company.

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The market for pools in Australia is very strong and highly competitive. Each of the directors
deals with this by devising expensive advertising campaigns, and attempting to undercut their
competitors’ prices.

Unfortunately, Harry, Irene and Henry are not good financial managers. In recognition of this
they employ a financial accountant, Brad, to manage the financial side of the business. Brad
is paid a good salary for this, but he has no say in the company’s activities.

Brad advises Harry, Irene and Henry that they have to refrain from their undercutting
practices, because their cash flow position is in peril. The directors tell Brad not to interfere
in managerial decisions, but just make sure there is money to pay the subcontractors. Brad
finds this increasingly difficult and begins to undertake a programme of only paying select
creditors. The company has few options left to generate sufficient cash to fund continuing
operations.

In frustration with the company’s troubles, Brad resigns. The directors are then served with a
director penalty notice from the Australian Taxation Office and they respond by putting the
company into voluntary liquidation.

The liquidator investigates the actions of Harry, Irene and Henry in the months leading up to
the liquidation and seeks your advice as to whether the directors incur any liability for the
debts of the company.