Question

1. Krazy Kars Pty Ltd (Krazy Kars) equips and sells customised off-road vehicles to operators in the tourist industry. The directors are Carlos, Possum and Michele. According to its constitution, although Michele as the only full-time director routinely arranges day-to-day purchases and services, any contract worth more than $100,000 between the company and any other party must be approved by a majority of the directors. With changes to the market, the company’s profitability is declining and the directors agree the business should diversify. Michele volunteers to explore options while she is touring Australia on her winter holidays and to come back with ideas to present to Carlos and Possum at the next directors’ meeting. The other two agree. When Michele arrives in Darwin she attends a car show and is fascinated by mini rally cars displayed at the MRC Pty Ltd stall. Sebastian, who owns MRC Pty Ltd, tells her that MRC is a new tourism enterprise and that he is looking for businesses able to construct and repair such cars. Michele hands Sebastian her business card that describes her position as “Managing Director” for Krazy Kars. Michele sees a real opportunity for Krazy Kars to get involved and, after Sebastian tells her there are lots of interested parties, immediately lets him know Krazy Kars can construct and supply 200 mini rally cars over the next calendar year. She signs a contract as “Managing Director of Krazy Kars” that commits Krazy Kars to provide those cars at a price “covering the cost of manufacturing plus 10%”.

On Michele’s return to the office she calls the other directors together to tell them the good news. To her disappointment, Carlos and Possum conclude that Krazy Kars is unable to meet these targets and that Michele had no right to make such commitments. They pass a motion (over Michele’s objections) that Sebastian should be told that Krazy Kars will not be providing the vehicles. When Sebastian finds out, he demands that Krazy Kars honours the contract Michele signed.  

Required: EITHER advise Sebastian as to whether (and why) Krazy Kars IS bound by the contract OR advise Carlos and Possum as to whether (and why) Krazy Kars is NOT bound by the contract.

Remember to give reasons and refer to legislation and cases, where relevant, in your answer

Answer 1

Krazy kars Pty Ltd is engaged in the business of selling customised off road vehicles and the directors are 3 individuals namely Carlos, Possum and Michele. Michele is the whiel time director of the entity, and as per the constitution of the entity it says any contract entered of more than $100000, between the company and any other third party shall be approved by majority of the directors.

Michele goes on a trip to Australia and volunteers to explore the options available and come back and present the same with the other directors. Carlos and Possum agreed only to Michele on exploring options and discussing the same with them, upon which they shall always abide by the constitution of the entity which says majority directors. Mere agreeing with Michele to explore the options available in Australia doesn't anyway mean she shall over power and directly enter into a business dealing with MRC Pty Ltd.

Michele is not vested with powers to directly engage in business dealing without obtaining the consent of the majority of the directors, provided the contract of cars she entered into is more than $100000, then such contract shall be void alb initio as it's invalid, as it is out of her scope to solely decide, and further she has signed the contract with MRC Pty Ltd as managing director, whereas she is only full time director.

MRC Pty Ltd shall take the dispute to the court of law, as Michele on behalf of Krazy kars Pty Ltd has signed, and the court may decide penalty amount to be paid by the latter as means of compensation, after hearing from both ends, for giving false hopes in entering into a deal by overpowerment of the designation given.