Question

You and two friends own a small limousine service. You have incorporated and exist as a close corporation, with the three of you as the shareholders and directors. You have structured the business so that each of you is also an officer with a salary. Any income to the corporation that is not paid out in salary or used for operations is reinvested in the corporation to expand the business. You serve as President of the corporation and handle all of the hiring. Your friend, Anna, serves as Vice President of Marketing and Finance. She handles all of the marketing efforts and manages the accounts. The second friend, Elijah, serves as Vice President of Acquisitions. His job is to increase the number of cars you own and to manage the maintenance of the fleet. You come in to work one day and see a number of fairly new, but fairly beaten up, cars in the parking lot. You ask Elijah about them and he tells you that he bought them for the company. He explains that his friend, Mitchell, runs a business about 200 miles from your town. Mitchell called Elijah last night and offered him the cars at an unbelievably low price. Elijah agreed to buy them on the spot and faxed the signed contract to Mitchell. The cars arrived this morning. They are completely unusable for your business. Evaluate whether you can make Elijah reimburse the company for the cost of the cars.

Answer 1

Answer:

As a director of the company, Elijah is also an agent of the company. As such , he is dutybound to exercise reasonable care in all transactions entered by him on behalf of the company. In the instant case, it is obvious that he has failed to exercise the degree of care and skill expected of a person of ordinary prudence. If someone makes an offer to sell cars at an unbelievely low price, two doubts should crop up in the mind of any rational person : Are the merchandise of offer stolen property? Or are they fective merchandise?

But, Elijah did not bother to go to the site of the seller to physically inspect the cars. He closes the contract on the basis of a telephone call.

In the given case, the cars are not usable. Maybe they can be used after sunstantial repairs. But that too indicates that the annual maintenance cost for the cars is going to be much higher than the normal cars. Both these factors are going to adversely impact the profitability of the company.

Another relevant fact is that Elijah should have consulted with the other directors of the company in this case before entering the contract on behalf of the company, specially since Micheal the seller of the cars happens to be Elijah's friend, and there could have been a conflict of interest.

Given the above circumstances, the following steps can be taken against Elijah by the company:

a. Since Elijah, as the company's agent has failed to apply reasonable care and skill in the conduct of the affairs of the principal, the company can repudiate the contract with Michel, which would render Elijah personally liable for the debt contracted.

a. Terminate Elijah's contract with the company.

b. Resist Elijah's claims on salaries and compensation for loss of office.

c. File a suit against Elijah for restitution of the sum paid for the defective cars.

d. File a suit against Elijah for damages, if it can be proved that he was to make any secret profits from the transaction.