Business Law Case Study
Conflict of interest
As one of the directors of Me, Me, Me Limited, Lu can sue the other two directors, viz. Jack and Ann for conflict of interest. In suing the two directors, Lu should cite the decision by Ann and Jack to lease a stylish and expensive office within the city center despite the fact that this move would adversely affect the company’s financial position. The fact that the office space that Ann and Jack intended to lease belonged to Ann’s husband underlines the existence of a conflict of interest between the company and Ann. Section 175 of the 2006 Companies Act stipulates that companies’ directors have a duty to avoid situations that may directly or indirectly conflict with the company’s interests (Degenhardt 2010). The Act stipulates that conflict of interest may arise from different aspects. According to section 175 (2) of the Company Act, a conflict of interest might arise if one or all the directors exploit or take advantage of the company’s information, property, or opportunity (Dignam, Goo & Hicks 2011).
By entering into a lease agreement to lease the said expensive and stylish office space, Ann would benefit indirectly. Ann and Jack would therefore be in violation of the no-conflict rule. The no-conflict rule is underlined in the case of Aberdeen Railway Co. v. Blaike Bros. In this case, the directors did not disclose their personal interest in a contract that the company entered with (Scott & Black 2000). Ann’s failure to declare her relationship with the party with whom the company entered into a lease agreement further underlines the existence of a conflict of interest. Judge (2012) affirms that ‘any material personal interest held by a director must be formally declared to the company’ (p.87). The disclosure or declaration must be full and comprehensive. This assertion is underlined in Section 177 of the Company Act 2006, which stipulates that ‘if a director is in any way, either directly or indirectly, interested in a proposed transaction or arrangement with his or her company, it is that director’s responsibility to declare the nature and extent of interest to the other directors before the transaction being contemplated is actually entered into’ (Dignam, Goo & Hicks 2011, p.23). In this case, Lu learned of the nature of interest between Ann and the lease agreement through a third party. Subsequently, Ann was in breach of her duty owed to the company.
Breach of fiduciary duty
Moreover, the contract price was substantially high. By supporting the decision to lease a stylish and expensive office space, Ann and Jack were taking the opportunity of the company with the intention of benefiting from the company in an unethical manner. As the company’s directors, Ann and Jack have a fiduciary duty, which stipulates that a company’s directors are required to depict good faith, honesty, and integrity in undertaking their duties. Fiduciary duties are explicitly owed to a company. As a partner and directors of Me, Me, Me Limited, Ann and Jack should not allow their personal interests to intrude on the company’s operations (Cox & Hazen 2011). Ann and Jack have a fiduciary duty to ensure that the price of the lease is as low as possible and that neither of the directors benefits from the company’s lease agreement (Griffiths 2005). Therefore, Ann’s and Jack’s move would constitute a breach of duty of loyalty, which is aimed at safeguarding a company against the director’s self-interest such as inappropriate self-dealing (Dravis 2007).
In addition to the above aspect, Lu should seek a court injunction aimed at stopping Jack and Ann from engaging in unethical practices by misleading and engaging in falsehood through advertisement. In seeking an injunction, Lu should focus on compelling the court to stop Jack and Ann from deceiving potential clients to attend a conference at a non-refundable fee and subsequently cancelling the conference hence benefiting from the money collected. This aspect is underlined in the case of Director General of Fair Trading v. Tyler Barrett and Company Limited; the court ruled that Tyler Barrett and Company Limited misled clients by promising to offer them an access grant from the European Union at a refundable fee of £350 if the grant was not successful. Acting from this advertisement, the clients, who mainly entailed small businesses, paid the £ 350 with the hope of accessing the said grant. The company only provided the businesses with a list of companies that specialise in issuing grants. The list of grant-issuing companies was irrelevant to the client’s line of business. The company refused to refund the £350. The court ruled that Tyler Barrett and Company Limited should stop making the advertisement and refund the £ 350 fee to clients. Similarly, the company’s restriction against involvement in the misleading advertisement is underlined in the case of Dixon Limited v. Barnett (1988), in which Dixon Limited advertised its telescope’s capability to magnify objects by up to 455 times. Nevertheless, the telescope’s useful magnification capability was only 120 times, of which magnification beyond this point was blurred (Channing 2013). Through this approach, Lu would succeed in ensuring that the company’s reputation is maintained. In summary, Lu can succeed in stopping Ann and Jack from engaging in practices that culminate in contravention of their duty as directors.
Part 2
False and misleading advertisement
The scenario underlines the existence of false and misleading advertisements by Gleam Machine. Therefore, May should seek compensation from Gleam Machine for not only finding dirt on her car after the car is washed using the machine but also for her car's damage. In seeking legal redress, May should affirm that her decision to seek car washing services from Gleam Machine was informed by the offer made by Gleam Machine through the notice board. Nevertheless, the notice was not only false but also misleading. Therefore, in making a ruling, the court will seek to determine whether Gleam Machine is involved in the provision of untrue or misleading advertisements. Advertisements are aimed at informing and stimulating consumers to act positively toward the product or service being offered (Wild 2011). Nevertheless, businesses have a responsibility to ensure that the information being provided through the advertisement is reliable.
Gleam Machine provided misleading information by affirming that a customer would receive a brand new car in the event that he or she notices dirt after using the car washing machine. Thus, Gleam Machine was involved in unfair and unethical business practices, which is in contravention of the Control of Misleading Advertisement Regulation 1988, which is underlined by the EU Council Directive 84/450. The directive stipulates that the Director General of Fair Trading has the capacity to seek an injunction against a company or business involved in misleading advertisements (Ardi 2012). Gleam Machine promised to offer a brand new car to a client in the event of noticing dirt. However, the ‘brand new car’ that the company provided involved a toy, which was misleading (Howells et al. 2012).
In reference to the above common law cases, May should seek legal redress against Gleam Machine under the Trade Description Act 1968 for involvement in falsehood (Winn 2006). The Act stipulates that businesses should ensure that the trade descriptions through advertisements should communicate accurate and reliable information (Glazebrook 2015). In their advertising process, businesses should ensure that information regarding the performance, size, date, place of manufacture, quantity, and the process used in developing a product or service are true. For example, in the case of British Gas Board v. Lubbock (1974), British Gas misled customers regarding the ignition of its gas cooker. In the advertisement, the company stated that its gas cooker was ignited using a handheld ignition pack. However, this was not true. The company was compelled to desist from making an advert on the basis of misleading information (Cram 2016).
Unfair contract terms and exclusion clause
In addition to the above legal issues, the scenario further underlines the existence of unfair contract terms. Despite the fact that May received a receipt containing an exclusion clause, which stipulates that Gleam Machine would not be liable for any loss or damage arising from a client’s use of the cleaning machine, the exemption clause was not visible because it was stated at the back of the receipt. Jones (2015) affirms that an exclusion clause must be clearly stipulated and unambiguous for it to be valid. For an exclusion clause to be effectively incorporated in a business contract, the exclusion clause must be optimally incorporated. Kelly, Holmes, and Hayward (2002) accentuate that ‘an exclusion clause cannot be effective unless it is actually a term of contract’ (p. 150). One of the ways through which a business can ensure that the exclusion clause is optimally incorporated in the contractual agreement entail issuance of a notice. An exclusion clause cannot be optimally integrated into a contract unless all the parties to the contract are adequately provided notice of the clause.
The fact that the exclusion clause was stated at the back of the receipt indicates the existence of unfair contract terms, which means that the exclusion clause was not valid. This arises from the fact that May did not have an opportunity to understand the terms of the contract, which puts her at a disadvantage. This aspect is underlined in the case of Chapelton v Barry UDC (1940). In this case, the plaintiff hired a deck chair and was issued a ticket. At the back of the ticket, the firm had stated that it would not take responsibility for any injury arising from the deck chair hire. Chapelton suffered injury from falling as a result of the chair collapsing. Chapelton successfully sued Barry UDC. The court ruled that the ticket issued was merely a receipt and hence would not be used as an effective means of communicating Barry UDC’s exclusion clause. Kelly, Holmes, and Hayward (2002) accentuate that the notice on exclusion clause given to the client must be sufficient for the average person. In this case, the notice relating to the exclusion clause was not sufficient because May was not adequately informed of the clause before accepting the offer from Gleam Machines.
This aspect is further underlined in the case of Olley v Marlborough Court Hotel Limited (1949). In this case, a couple checked into a hotel and paid for the intended hotel services in advance. However, on entering the room booked, the couple noticed a notice that stated that the hotel is excluded from all liabilities arising from the theft of all personal items not handed to the hotel’s manager. In the course of their stay, the wife’s purse was stolen. The court ruled that the hotel was responsible for the liability because the exclusion clause or the disclaimer was not sufficiently made. This arises from the fact that it was made after the contract had already been entered into. On the basis of this aspect, May can seek compensation for the damage to her car by Gleam’s car washing machine (Rush & Ottley 2006).
Negligence
In addition to the above aspect, May should seek legal redress against Gleam Machine for damage of her car. In seeking legal redress, May should argue that the exclusion clause does not exclude Gleam Machine against negligence. The damage to May’s car was a result of negligence. Jones (2015) asserts that ‘if a party wishes to exclude damage caused through negligence, this has to be explicitly stated in the exclusion clause’ (p. 174). This aspect is underlined in the case of Hollier v. Rambler Motors Limited (Jones 2015). May’s success in seeking damages is supported by Section 2 of the Unfair Contract Terms Act 1977, which stipulates that businesses have a responsibility to take reasonable care. Therefore, a business cannot exclude itself from liability due to acts of negligence.
The analysis underlines the fact that businesses cannot exclude themselves from liability on the basis of the exclusion clause if notice of the exclusion clause is not sufficiently and adequately communicated to the client prior to entering into a business contract. The analysis further underlines the fact that businesses cannot exclude themselves from liability for engaging in negligence. Similarly, businesses are liable for any liability encountered by a client as a result of false or misleading advertisements.
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