Contract Questions: Case study – Business ethics

Business Ethics

Goodman sold a building to DDS that needed restoration; moreover, Goodman depicted that he had expertise in renovation work. In the course of discussions on a restoration contract, the chief executive informed the partnership that he would be creating a corporation to be able to limit his private liability. A contract included an arbitration clause that was implemented. Nevertheless, the job was not concluded on time and was of bad quality. Following the apparent default, the chief executive filed articles of incorporation, and there was the issuance of a corporate license. Following numerous efforts to remedy the claimed breaches, the partnership served the chief executive with an arbitration demand. The demand named both the chief executive and the corporation. The matter on appeal was whether or not the chief executive (being a promoter), was a party to the contract of pre-incorporation and consequently, whether it was necessary for him to participate in the arbitration.

Goodman could be held personally liable for the contracts of restoration with DDS. A company becomes liable for a contract signed by an agent prior to the formation of the corporation if it consents to be bound by novation, ratification or adoption. The contract’s liability will not automatically transfer, due to the fact that the agent was serving as the agent of a non-existent principal during the entering of the contract. The ratification of the contracts by the agent was not permitted in the state of Washington, and there was no occurrence of novation. For that reason, if the freshly formed corporation decided to be bound by the restoration contract it would have to be through adoption. After adoption, the corporation results in being liable for the contract. Nevertheless, the agent continues to be personally liable on the contract, except in cases where the third party concurs to release him from the liability. Considering that DDS never agreed to release Goodman from the contract’s liability, Goodman remained personally liable.

In my view, it may not be illegal for Goodman to refute liability, and Goodman has the right to deny liability stipulated that he did nothing wrong. It may be up to the Trier of the fact to make a decision whether Goodman did or never did anything. Ethically he is aware that he may be liable if he was wrong; however, the law and ethics are never always linear at the conclusion. The court never decides whether or not Goodman may be personally liable. The court only determines whether Goodman ought to be a party to the arbitration/action. As a result, it may be probable that Goodman is considered liable.

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37.5. Dividends

Gay (the appellant), contended that in the year 1971, Gay &’s Super Markets, Inc., was unable to declare the dividend for that year. Moreover, he contended that the act was never in good faith and in reality they were utilizing this method as a way of pressuring him to relieve his interest in the company. Appellees asserted that the decision not to declare the dividend for that year was because of the projected capital requirements of the company and the motivation behind the same was not ill-intended towards the appellant. The judge found that, even though, the complaint by the appellant was formidable on accusations of unlawful activity by the appellees through implementing a “no-dividend” policy. The appellant was unable to present any proof that the company’s decision was actually motivated by ill-will towards him.

In my view, the Super Market ought to win except in cases where Gay can prove that the motives presented by the directors were unwarranted and that their activities were plainly inconsistent with sound organizational practices. Amongst the appellees, one of them testified that the withholding of dividend was as a result of the contemplated business expansion of the company’s amenities. The evidence was nowhere in the record to support the charges by the appellant. It would have been essential to infer from the simple reality of cash surplus by the trial judge, that there was a discretion abuse, through the refusal to declare a dividend. Considering the fact that the company had launched considerable business expansion programs, the court held that it was incapable to say that indeed there was a discretion abuse; consequently, Lawrence Gay loses.

37.7. Duty of Loyalty

Corporate employees, officers, members, and directors are obligated to a duty of care to the company. Violation of duty is an element of a negligence lawsuit (Lawyers.com, n.d.). In a lawsuit involving negligence, there are four components that have to be regarded: damages, causation, duty, and breach of duty. For breach of duty, the decision of whether or not the accused behaved in a manner that a sensible person would have under comparable scenarios given their placement with the corporation and the degree of obligation ought to be considered (Cheeseman, 2010). Stipulated that no duty is owed; consequently, there may be no lawsuit involving negligence.

In this case, Chelsea is the winner and could recover loss and damages from Gaffney, and his associates; due to the fact that, officers and directors of any company have a duty of loyalty to the company. This duty involves not competing with the company, except in cases where full disclosure of the competitive exercise is made, and a vast majority of the disinterested investors agree to the exercise. Officers and directors cannot utilize the funds, facilities or personnel of the company for their own advantage. The company can retrieve any revenue made by the unapproved competitiveness and any other loss induced by the company. The activities of Gaffney and the other officers amount to a violation of their duty of loyalty. Through Gaffney’s and his associates customers’ recruitment at the time, they were on Ideal business. These individuals were all officers of the company and ought to be held responsible for it. As a result, Chelsea would win. The loss and damages would consist of lost revenue, as well as, any funds Chelsea paid towards travel, salary, etc. that were utilized by Gaffney and his partners to further their own enterprise.

39.9. Duty of Loyalty

A fiduciary relationship prevails when the parties involved are “within a duty to give advice or act for the advantage of another upon issues under the scope of the relation” (Restatement of the Law (2nd) of Torts, 1979-2010). It prevails where special confidence  may be reposed in another who in good conscience and equity is likely to act in good faith and with due consideration to the pursuits and interests to the person that is reposing confidence.”  When individuals enter into fiduciary relations, each and every one of them consents under law, to have his conduct to the other assessed by the specifications of the finer loyalties that the equity courts exact. That may be a sound rule and ought, not to be whittled down by exceptions.

In my view, Ally may be liable for the damages made to Movers & You, LLC since she owed loyalty to that corporation.  Centered on the ideas from the preceding question, a member who is either a manager or a director in a “manger-managed” LLC owes the LLC, a duty of loyalty.  To behave truthfully and not to confidentially contend with the corporation may be part of the duty of loyalty; as a result, Movers & You, LLC could seek to restore damages which includes loss of revenue specifically attributable to the efforts of Ally at Lana & Me, LLC. In addition, Movers & You, LLC could seek to recover the funds they invested in her, in the course of her work at Lana & Me, LLC. Nevertheless, there may be a problem of a statute of limitations; however, the facts never provide adequate facts to know whether or not this may be an authentic case or a hypothetical case.


  • Cheeseman, H. (2010). Business Law: Legal Environment, Online Commerce, Business Ethics,
  • and International Issues. (7th Ed.). Pearson Learning Solutions.
  • Chelsea Industries, Inc. vs. Gaffney, 389 Mass. 1, 449 N.E.2d 320, Mass. Lexis 1413 (Supreme
  • Judicial Court of Massachusetts, 1983). Retrieved on Feb 10, 2015, from; http://masscases.com/cases/sjc/389/389mass1.html
  • Gay vs. Gay &’s Super Markets, Inc., 343 A.2d 577, Me. Lexis 391 (Supreme Judicial Court of
  • Maine, 1975). Retrieved on Feb 10, 2015, from; http://www.leagle.com/xmlResult.aspx?xmldoc=1975920343A2d577_1910.xml&docbase=CSLWAR1-1950-1985
  • Goodman vs. Darden, Doman and Stafford Associates, 100 Wn.2d 476, 670 P.2d 648, Wash.
  • Lexis 1776 (Supreme Court of Washington, 1983). Retrieved on Feb 10, 2015
  • Lawyers.com. (n.d.). “Fiduciary Responsibilities and LLCs.” Small Business Law.
  • Restatement of the Law (2nd) of Torts. (1979-2010). American Law Institute.
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