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WHAT IS IRAC?

IRAC (pronounced EYE-rack) is an acronym that generally stands for:

Issue
Rule
Application
Conclusion

The IRAC approach is a useful tool for structuring legal writing and is mostly used to guide
students in answering hypothetical legal questions.

Using the IRAC approach to write a formal answer

1) State the issue(s) involved in the question.

2) State the relevant legal rule (the law) (for example, section of the Corporations Act) for the
first issue (if there are more than one). If both statute and case law apply, deal with the statute
first.

3) Apply the law to the facts of the problem. This means explaining why the law that you
have just stated is relevant to the facts of the problem. As far as possible, use the actual
words stated in the problem when explaining the law's relevance.

(a) If the relevant legal rule (the law) is the statute, you must explain why
the statute is wide enough to cover the fact situation you are analysing.
This may involve explaining how the words of the statute have been
interpreted by courts and in turn, whether they cover or include the facts
of the problem.

(b) If the relevant legal rule (the law) is case law, you must explain why
the case law is relevant to the facts of your problem. You should make
use of the principles known as the doctrine of precedent to do this.

4) Provide argument. It is necessary to consider the law from both parties' points of
view. Sometimes the law can be interpreted in different ways for argument's sake;
sometimes the relevant cases differ in their interpretations of the law. One side might
choose one interpretation, the other side, another. The best answers show an
understanding of these differences.

5) Do the same for each issue.

6) Draw a conclusion from your preceding arguments. You should try to decide in
favour of one of the parties.





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SAMPLE QUESTION

Hacker and Mclntosh owned a small computer company, Honeypot Pty Ltd, which
produced specialised software programs.

Hacker acted as the managing director even though he had never actually been
appointed. One contract he entered into on behalf of Honeypot was for $50,000 worth
of hardware from BIM. At the time, the sales manager at BIM suspected Honeypot was
in trouble so he obtained guarantees from Hacker and Mclntosh, to protect BIM's
position. When Honeypot failed, Hacker and Mclntosh realised that as guarantors they
would have to pay the $50,000 (as the company had no assets).They desperately sought a
way out and were delighted when they remembered that Hacker had no real authority to
enter into the contract on Honeypot's behalf. Therefore, they thought the contract was
unenforceable.

Assuming that the manner in which the contract has been executed is not in contention,
will Hacker and Mclntosh be liable for the $50,000 under their personal guarantees?
Explain.


SUGGESTED ANSWER

1) The Issue

The legal issue in the dispute concerning Honeypot Pty Ltd and BIM is: "When is a
company bound in contract by a person who purported to represent the company, but
who in fact has no authority to do so?"

2) Relevant Legal Rule (The Law)

The argument would centre on interpretation of ss 128-129 of the Corporations Act, and the
cases of Freeman & Lockyer, Brick & Pipe and the possible relevance of cases such as Fiberi,
Sixty-Fourth Throne and Pyramid.

The Main Legal Principle

Section 129 lists certain assumptions that a person dealing with a company (in this case,
BIM) is entitled to make. The relevant assumption in this problem is s 129(3)(c), which
says:

"that a person may assume that anyone who is held out by the company to be an officer ...
of the company has been duly appointed and has authority to exercise the powers ...
customarily exercised ...by that kind of officer - of a similar company. "

3) Application - Argument on the facts

It would seem that Hacker was held out by Honeypot to be managing director as the facts
state that "Hacker acted as managing director". It is likely that Hacker would have entered
into other contracts on behalf of Honeypot before the contract between Honeypot and
DIM was established. If this was the case, then it would appear to outside parties that
Hacker did hold the position of managing director at Honeypot. As Hacker and Mclntosh
are equivalent to the company, being at such a senior level (owners) that their state of
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mind is regarded as that of the company's, BIM has held out Hacker to be managing
director. Therefore, BIM is entitled to make the assumption that Hacker is authorised to
act on its behalf as it would normally be within a managing director's powers to enter into
a contract for $50,000.

Supporting Cases

Cases which support this view are Freeman & Lockyer and Brick & Pipe. In both cases it
was held that the company was bound to a contract entered into by a person who was
not properly appointed as managing director. The court said that as the company had
allowed the person to act as managing director, the company was estopped from denying
that representation.

Second Principle and Opposing Argument

However, it is not always the case that an outsider can rely on the statutory
assumptions in s 129. Section 128(4) contains a proviso that these assumptions cannot
be made if at the time of the dealings they "knew or suspected" that the assumption in
s 129(3) was incorrect.

Application of the Second Principle

If s 128(4) applies, then the assumption in s 129(3) cannot be relied upon and, therefore,
the contract between Honeypot and BIM will be unenforceable because of the absence of
(substantive) authority. It is mentioned that the sales manager of BIM "suspected"
Honeypot was in financial trouble and so obtained guarantees from Hacker and Mcln-
tosh. However, there does not appear to be any evidence that he knew or suspected that
the assumption in s 129(3) was incorrect - that is, that Hacker was not duly appointed as
Honeypot's managing director with authority to enter such a contract.

Under the former s 164(4), it was suggested by some judges that suspicion of financial
trouble might be sufficient to require the sales manager to have inquired further - that is,
Fiberi, Sixty-Fourth Throne, and Pyramid. However, these cases were interpreting the
wording of the former s 164(4). The exceptions contained in s 128(4) are different - that
is, "suspected" rather than a connection or relationship such that the outsider "ought to
have known". As yet, we still have no judicial interpretation of the new wording and it is
uncertain of what relevance, if any, the earlier cases (such as Fiberi etc) will be. Given the
intention expressed in the Explanatory Memorandum that accompanied the new
provisions, the better view is that the exception in s 128(4) will not apply to BIM.

4) Conclusion

In conclusion, it would seem most likely that BIM will, by reliance on the assumption in s
129(3), be able to enforce its contract with Honeypot. There is, as yet, no judicial
interpretation of the exceptions in s 128(4) but, on balance, it is unlikely that the
knowledge of BIM's sales manager would be sufficient to bring the exception into play. If
Honeypot has insufficient assets to meet its obligations under the contract, then Hacker
and Mclntosh will be liable for any shortfall in the $50,000 under their personal guarantees.




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NOTES

Be careful to read the question closely. The reference in the question to "Assuming
that the manner in which the contract has been executed is not in contention", tells
you not to spend valuable time discussing the ways a company can execute a
contract - that is, formal authority, ss 126-127. The lecturer has deliberately
narrowed the scope of the question (possibly because of the amount of time there
might be in the exam to spend on this question), to a consideration of the issue of
authority (that is, substantive authority).

The question raises a very contentious point namely, how will the new exceptions in
s 128(4) be interpreted. There is no clear answer to this especially on the facts given.
Remember, marks are awarded for:

identifying that the law is unclear; and
expressing a considered opinion,

whether or not the lecturer would take the same view.

The length (and detail) of the answer should reflect the proportion of marks
allocated to the question. If more time was allowed, the cases could be discussed in
more detail. However, the basic structure should still be followed. Short headings
are a helpful way to guide the marker (for example, Issue, Relevant Legal Rule,
Application, Conclusion etc).


REFERENCE

Ciro T. & Symes S., "Corporations Law: In Principle", 8th Edition, The Lawbook Co., 2009,
p.p. xvi-xix.