Business and corporate law [Second edition.] 9780455239170, 0455239177

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BUSINESS AND CORPORATE LAW

Thomson Reuters (Professional) Australia Limited 19 Harris Street Pyrmont NSW 2009 Tel: (02) 8587 7000 Fax: (02) 8587 7100 [email protected] legal.thomsonreuters.com.au For all customer inquiries please ring 1300 304 195 (for calls within Australia only)

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BUSINESS AND CORPORATE LAW

Compiled by Enshen Li Lecturer in Law The University of Queensland

SECOND EDITION

Published in Sydney by Thomson Reuters (Professional) Australia Limited ABN 64 058 914 668 19 Harris Street, Pyrmont, NSW ISBN: 9780 455 23917 0 © 2017 Thomson Reuters (Professional) Australia Limited This publication is copyright. Other than for the purposes of and subject to the conditions prescribed under the Copyright Act, no part of it may in any form or by any means (electronic, mechanical, microcopying, photocopying, recording or otherwise) be reproduced, stored in a retrieval system or transmitted without prior written permission. Inquiries should be addressed to the publishers. Product Developer: Vickie Ma Printed by Ligare Pty Ltd, Riverwood, NSW This book has been printed on paper certified by the Programme for the Endorsement of Forest Certification (PEFC). PEFC is committed to sustainable forest management through third party forest certification of responsibly managed forests. For more info: http://www.pefc.org.

PUBLISHER'S NOTE Text compilation This publication has been prepared by drawing upon material from the following Thomson Reuters (Professional) Australia titles: • Jeswynn Yogaratnam and Lidia Xynas, Corporations Law: In Principle (10th ed, Lawbook Co., 2017) • Shayne Davenport and David Parker, Business and Law in Australia (2nd ed, Lawbook Co., 2015) • Christine Miles and Warwick Dowler, A Guide to Business Law (21st ed, Lawbook Co., 2015), chapters in this publication updated 2016 • Clive Turner and John Trone, Australian Commercial Law (31st ed, Lawbook Co., 2017) Pagination, paragraphs, cross-references and footnotes The content of this book has been re-paginated and re-paragraphed to run consecutively. Where a reference is made to text not contained within this publication, the original reference remains, with an indication of its origin, ie (Miles), (Davenport) and (Yogaratnam). Footnoting in the text has been re-numbered to run chronologically within each chapter.

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TABLE OF CONTENTS Publisher’s Note ........................................................................................................ v Table of Cases ............................................................................................................. ix

Topic 1: Introduction to the Australian Legal System .................... 1 Topic 2: Contracts: Formation and Contents............................... 45 Topic 3: Contracts: Validity and Ending ...................................... 111 Topic 4: Sale of Goods .............................................................. 183 Topic 5: Competition and Consumer Law .................................. 213 Topic 6: Introduction to torts (negligence)................................ 271 Topic 7: Law of Agency ............................................................. 335 Topic 8: Intellectual Property ................................................... 355 Topic 9: Business Organisations................................................ 475 Topic 10: Internal Rules ............................................................ 537 Topic 11: Meetings .................................................................... 557 Topic 12: Corporate Liability: Contract, Tort and Crime ............. 583 Topic 13: Directors and Officers................................................. 611 Topic 14: Remedies for Members .............................................. 745 Topic 15: Share Capital ............................................................. 797 Topic 16: Transactions Affecting Share Capital ......................... 809 Topic 17: Loan Capital ............................................................... 831 Topic 18: Fundraising................................................................ 851 Topic 19: External Administration............................................. 877 Index ......................................................................................... 903

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TABLE OF CASES A A-One Accessory Imports Pty Ltd v Off Road Imports Pty Ltd (1996) 65 FCR 478 ..................................................................................................... 8.100 A Schroeder Music Publishing Co Ltd v Macaulay [1974] 1 WLR 1308.......................... 3.356 AAPT Ltd v Cable & Wireless Optus Ltd (1999) 17 ACLC 974 .......................... 12.340, 12.350 ACCC v ANZ Banking Group Ltd [2013] FCA 1206................................................... 5.155 ACCC v Apple Pty Ltd [2012] FCA 646 ............................................................... 5.640 ACCC v Bytecard Pty Ltd VID301/2013 (filed 19 April 2013) ....................................... 5.920 ACCC v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51.......................................... 3.240 ACCC v Colgate-Palmolive Pty Ltd (No 2) [2016] FCA 528 ........................................ 5.130 ACCC v Flight Centre Limited (No 2) [2013] FCA 1313 .............................................. 5.160 ACCC V IGC Dorel Pty Ltd [2010] FCA 1303 .......................................................... 5.425 ACCC v Jewellery Group Pty Ltd (No 2), The [2013] FCA 14 ...................................... 5.630 ACCC v Jurlique International Pty Ltd [2007] FCA 79.............................................. 5.410 ACCC v Link Solutions Pty Ltd (No 3) [2012] FCA 348 ............................................. 5.390 ACCC v Lux Distributors Pty Ltd [2013] FCAFC 90 ................................................. 5.590 ACCC v Metricon Homes Qld Pty Ltd [2012] FCA 797 ............................................. 5.660 ACCC v Pfizer Australia Pty Ltd [2015] FCA 113 ..................................................... 5.320 ACCC v Powerballwin.com.au Pty Ltd [2010] FCA 378............................................ 5.585 ACCC v Snowdale Holdings Pty Ltd [2016] FCA 541 ............................................... 5.585 ACCC v TPG Internet Pty Ltd (2013) 250 CLR 640; [2013] HCA 54............................... 5.584 ACCC v Taxsmart Group Pty Ltd [2014] ATPR 42-473; [2014] FCA 487........................ 8.2800 ACCC v Telstra Corporation Ltd (2007) 244 ALR 470; [2007] FCA 1904 ........................ 5.585 ACCC v Tyco Australia Pty Ltd [1999] FCA 1799 ..................................................... 5.115 ACCC v Visy Holdings Pty Ltd (No 3) [2007] FCA 1617 ...................................... 5.115, 5.120 ANZ Banking Group Ltd v Australian Glass & Mirrors Pty Ltd (1991) 9 ACLC 702............ 12.170 ANZ Banking Group Ltd v Frenmast Pty Ltd [2013] NSWCA 459; (2013) 282 FLR 351 ...................................................................................... 7.115, 12.60, 12.130 ANZ Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662................ 3.731 ANZ Executors & Trustee Co Ltd v Qintex Australia Ltd [1991] 2 Qd R 360.................... 12.30 ANZ Executors & Trustee Co Ltd v Qintex Ltd (1990) 8 ACLC 791 ................... 13.940, 13.950 ASC v Donovan (1998) 28 ACSR 583 ............................................. 13.480, 13.540, 13.670 ASC v Gallagher (1993) 11 WAR 105 ................................................................. 13.660 ASIC v Adler (2002) 168 FLR 253 .. 13.280, 13.380, 13.480, 13.490, 13.500, 13.520, 13.540, 13.590, 13.620, 13.660, 13.700, 13.720, 13.760, 13.1080, 13.1240, 13.1250, 13.1370, 16.470, 16.480, 16.520 ASIC v Australian Investors Forum (No 2) (2005) 53 ACSR 305 ................................ 13.540 ASIC v Axis International Management Pty Ltd (2011) 81 ACSR 631 ........................... 18.100 ASIC v Chemeq Ltd (2006) 234 ALR 511.............................................................. 13.80 ASIC v Citrofresh International (2007) 164 FCR 333 .............................................. 13.435 ASIC v Citrofresh International Ltd (No 2) (2010) 77 ACSR 69.................................. 13.435 ASIC v Deloitte Touche Tohmatsu (1996) 70 FCR 93 ............................................. 14.740 ASIC v Fortescue Metals Group Ltd (2011) 190 FCR 364 ......................................... 13.622 ASIC v Fortescue Metals Group Ltd (No 5) (2009) 264 ALR 201................................ 13.622 ASIC v Gallagher (1993) 11 WA R 105 ................................................................ 13.590 ASIC v Healey [2011] FCA 717.......................................................................... 13.614 ASIC v Hellicar [2012] HCA 17 ...................................................... 13.580, 13.586, 13.660 ASIC v Macdonald (No 11) (2009) 230 FLR 1 ....................................................... 13.640 ASIC v Mariner Corporation Ltd [2015] FCA 589 .................................................. 13.765 ASIC v Maxwell [2006] NSWSC 1052 ................................................................ 13.435 ASIC v NRMA (2002) 43 ACSR 451.................................................................... 11.140 ASIC v Narain (2008) 169 FCR 211 .................................................................... 13.435 ix

Business and Corporate Law

ASIC v Plymin (2003) 175 FLR 124.............................. 13.280, 13.480, 13.800, 13.830, 13.840 ASIC v Rich (2003) 174 FLR 128 ................................. 13.540, 13.590, 13.610, 13.620, 13.680 ASIC v Rich (2004) 50 ACSR 500 .................................................................... 13.680 ASIC v Somerville (2009) 77 NSWLR 110 ........................................................... 18.240 ASIC v Vines (2003) 182 FLR 405 ......................................... 13.520, 13.540, 13.610, 13.690 ASIC v Vines (2006) 58 ACSR 298 ................................................ 13.584, 13.590, 13.690 ASIC v Vines (2007) 62 ACSR 1 .............................................................. 13.600, 13.620 ASIC v Vines (2007) 63 ACSR 505.................................................................... 13.690 ASIC v Vizard (2005) 145 FCR 57 ................................................. 13.280, 13.1210, 13.1250 ASIC v Warrenmang Ltd [2007] FCA 973 ........................................................... 13.435 ASIC v Wellington Capital Ltd [2012] FCA 1140...................................................... 14.20 AWA v Daniels (1992) 10 ACLC 933 ................................................................... 6.530 AWA Ltd v Daniels (1992) 10 ACLC 933................................. 13.582, 13.640, 13.660, 13.680 AXA Asia Pacific Holdings Ltd v Direct Share Purchasing Corp Pty Ltd [2009] FCAFC 15............................................................................................... 14.74 Abdurahman v Field (1987) 8 NSWLR 158........................................................... 3.270 Aberfoyle Ltd v Western Metals Ltd (1998) 84 FCR 113 ......................................... 18.100 Acehill Investments Pty Ltd v Incitec Ltd [2002] SASC 344..................................... 14.350 Adams v ASIC (2003) 46 ACSR 68 ................................................................... 13.280 Adamson v West Perth Football Club Inc (1979) 39 FLR 199 ..................................... 3.331 Addstead Pty Ltd (in liq) v Liddan Pty Ltd (1997) 70 SASR 21........................... 12.30, 13.940 Adeels Palace Pty Limited v Moubarak; Adeels Palace Pty Limited v Bou Najem (2009) 260 ALR 628; [2009] HCA 48............................................ 6.610, 6.820 Adler v ASIC (2003) 179 FLR 1 ........................ 13.280, 13.480, 13.490, 13.1370, 16.470, 16.520 Adler v DPP (Cth) (2004) 149 A Crim R 378............................................... 13.470, 13.500 Administration of Territory of Papua and New Guinea v Leahy (1961) 105 CLR 6 ............ 2.291 Advance Bank Australia Ltd v Fleetwood Star Pty Ltd (1992) 10 ACLC 703. 12.100, 12.140, 12.170 Advanced Building Systems Pty Ltd v Ramset Fasteners (Aust) Pty Ltd (1998) 194 CLR 171........................................................................................... 8.1810 Advent Investors Pty Ltd v Goldhirsch (2001) 19 ACLC 580 ..................................... 14.410 Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102...................... 13.825 Airpeak Pty Ltd v Jetstream Aircraft Ltd (1997) 73 FCR 161 ............................ 14.710, 14.720 Airservices Australia v Ferrier (1996) 185 CLR 483 ............................................... 19.250 Akiba v Commonwealth (2013) 250 CLR 209; [2013] HCA 33..................................... 1.260 Al-Shennag v Statewide Roads Ltd [2008] NSWCA 300 ......................................... 9.950 Alexander v Cambridge Credit Corp Ltd (1987) 9 NSWLR 310.......................... 6.440, 6.530 Alexander v Rayson [1936] 1 KB 169.................................................................. 3.316 Allco Funds Management v Trust Company (RE services) Ltd [2014] NSWSC 1251 ................................................................................................... 13.1128 Allen v Atalay (1993) 12 ACLC 7 ....................................................................... 14.710 Allen v Feather Products Pty Ltd (2008) 65 ACSR 642 ........................................... 9.950 Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656........................................... 14.320 Allergan Inc v Di Giacomo (2011) 199 FCR 126 ..................................................... 8.2325 Allied Mining & Processing Ltd v Boldbow Pty Ltd (2002) 169 FLR 369 ...................... 13.250 Alphapharm Pty Ltd v H Lundbeck A/S (2014) 254 CLR 247 .................................... 8.2040 Alpine Beef Pty Ltd v Trycill Pty Ltd [2010] FCA 136............................................... 4.680 Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676 ..... 4.520, 17.160 Amaca & Ors v Ellis [2010] HCA 5..................................................................... 6.820 Amaca Pty Ltd v Booth (2011) 246 CLR 361 ......................................................... 6.450 Amaca Pty Ltd v Ellis (2010) 240 CLR 111; [2010] HCA 5 ........................................... 6.820 Anaesthetic Supplies Pty Ltd v Rescare Ltd (1994) 50 FCR 1 ................................... 8.1830 Ancher Mortlock Murray & Woolley Pty Ltd v Hooker Homes Pty Ltd [1971] 2 NSWLR 278................................................................................... 8.180, 8.350 Anderson v Glass (1868) 5 WW & AB (L) 152 ........................................................ 2.351 Angus & Coote Pty Ltd v Render (1989) 16 IPR 387 ............................................. 8.2750 Annetts v Australian Stations Pty Ltd (2002) 211 CLR 317 ........................................ 6.370 Ansell Rubber Co Pty Ltd v Allied Rubber Industries Pty Ltd [1967] VR 37 .................. 8.2720 Ansons Pty Ltd v Merlex Corporation Pty Ltd (2001) 162 FLR 443 ............................ 13.300 x

Table of Cases

Anton Piller KG v Manufacturing Processes Ltd [1976] Ch 55.................................. 8.1250 Apand Pty Ltd v Kettle Chip Co Pty Ltd (No 2) (1999) 88 FCR 568 ........................... 8.2680 Apotex Pty Ltd v Sanofi-Aventis Australia Pty Ltd (2013) 253 CLR 284 ............. 8.1830, 8.2100 Argyll v Argyll [1967] 1 Ch 302 ....................................................................... 8.2700 Ariadne Australia Ltd, Re [1991] 2 Qd R 377 ........................................................ 11.140 Aristoc Industries Pty Ltd v RA Wenham Pty Ltd [1965] NSWR 581 ............................ 4.120 Aristocrat Technologies Australia Pty Ltd v DAP Services (Kempsey) Pty Ltd (in liq) (2007) 157 FCR 564 ........................................................................ 8.1210 Arkin v Tridon Australia Pty Ltd (2002) 43 ACSR 610............................................. 13.300 Armstrong v Jackson [1917] 2 KB 82 .................................................................. 7.161 Armstrong World Industries (Australia) Pty Ltd v Parma [2014] FCA 743 .................... 14.720 Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441................................... 4.600 Ashmore, Benson, Pease & Co Ltd v AV Dawson Ltd [1973] 1 WLR 828 ....................... 3.299 Associated Newspapers Ltd v Bancks (1951) 83 CLR 322 ......................................... 2.612 Association for Molecular Pathology v Myriad Genetics Inc 596 US 12-398 (2013) ................................................................................................ 8.1840 AstraZeneca AB v Apotex Pty Ltd (2015) 89 ALJR 798.......................................... 8.1900 Attorney-General (NSW) v Australian Fixed Trusts Ltd [1974] 1 NSWLR 110 ................. 18.100 Austral Pacific Group Ltd (in liq) v Airservices Australia (2000) 203 CLR 136; [2000] HCA 39 ....................................................................................... 4.700 Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270 .............................. 19.110, 19.115 Australasian Performing Right Assoc v Canterbury-Bankstown League Club Ltd [1964] NSWR 138 ............................................................................... 8.370 Australasian Performing Right Assoc Ltd v Commonwealth Bank of Australia (1992) 40 FCR 59 .................................................................................... 8.380 Australasian Performing Right Assoc Ltd v Tolbush Pty Ltd [1986] 2 Qd R 146 .............. 8.370 Australian Capital Television Pty Ltd v Minister for Transport & Communications (1989) 7 ACLC 525.................................................... 12.100, 12.250 Australian Capital Territory v Munday (2000) 99 FCR 72 ......................................... 3.335 Australian Innovation Ltd v Petrovsky (1996) 21 FCR 218 .............................. 11.320, 13.590 Australian Meat Industry Employees Union v Mudginberri Station Pty Ltd (1986) 161 CLR 98.................................................................................... 5.220 Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199.................... 13.1020 Australian Postal Corporation v Digital Post Australia Pty Ltd (No 2) (2012) 96 IPR 532 .............................................................................................. 8.2400 Australian Safeway Stores Pty Ltd v Zaluzna (1987) 162 CLR 479 .............................. 6.600 Australian Video Retailers Association Ltd v Warner Home Video Pty Ltd (2001) 114 FCR 324................................................................................... 8.420 Australian Woollen Mills Pty Ltd v The Commonwealth (1954) 92 CLR 424................... 2.295 Australian and International Pilots Association v Qantas Airways Ltd [2011] FWAFB 3706 ......................................................................................... 9.950 Autodesk Australia Pty Ltd v Cheung (1990) 94 ALR 472 ....................................... 8.1190 Autodesk Inc v Dyason (1992) 173 CLR 330 ......................................................... 8.150 Autodesk Inc v Dyason (No 2) (1993) 176 CLR 300 ................................................ 8.150 Automatic Self Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34............. 13.50 Automotive & General Industries Ltd, Re [1975] VR 454 ....................................... 13.1160 Avel Pty Ltd v Multicoin Amusements Pty Ltd (1990) 171 CLR 88 .............................. 8.360 Avery v Bowden (1855) 5 E & B 714; 119 ER 647 .................................................... 3.535 Avran v Gusaroski (2006) 31 WAR 400; [2006] WASCA 16 ............................... 6.700, 6.710

B BMW Australia Ltd [1998] ATPR (Com) 55-001 .................................................... 5.480 BNY Trust Company of Australia Ltd v Banksia Finance and Leasing Co Pty Ltd [2013] NSWSC 1776 .................................................................................. 12.60 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 .................. 2.630 Baigent v Random House Group Ltd [2007] All ER (D) 456; (2007) 72 IPR 195............... 8.230 xi

Business and Corporate Law

Bailey v New South Wales Medical Defence Union Ltd (1995) 184 CLR 399 ....... 10.250, 14.380 Balfour v Balfour [1919] 2 KB 571...................................................................... 2.242 Baltic Shipping Co v Dillon (1993) 176 CLR 344..................................................... 3.653 Bamford v Bamford [1970] Ch 212 ........................................................ 13.1390, 14.260 Bank of America Australia Ltd v Ceda Jon International Pty Ltd (1988) 17 NSWLR 290........................................................................................... 3.296 Bank of New Zealand v Fiberi Pty Ltd (1992) 10 ACLC 1557 ............................. 12.140, 12.170 Bank of New Zealand v Fiberi Pty Ltd (1993) 12 ACLC 48 ............................... 12.140, 12.170 Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 232....................................... 12.140 Bank of Victoria Ltd v Mueller [1925] VLR 642...................................................... 3.195 Barac (t/as Exotic Studios) v Farnell (1994) 53 FCR 193 ........................................... 3.312 Barnes v Addy (1874) LR 9 Ch App 244 ................................................... 12.130, 13.1078 Barron v Potter [1914] 1 Ch 895 ....................................................................... 13.50 Barton v Armstrong [1976] AC 104 .................................................................... 3.171 Bateman v Slatyer (1987) 71 ALR 553 .............................................................. 8.2800 Beck v Montana Constructions Pty Ltd [1964] NSWR 229...................................... 8.1070 Beck v Tuckey Pty Ltd (2004) 49 ACSR 555 ................................................ 11.150, 11.160 Beconwood Securities Pty Ltd v ANZ Banking Group [2008] FCA 594................. 15.30, 15.40 Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618....................... 8.2120 Bell v Lever Bros [1932] AC 161 ...................................................................... 13.1220 Belmont Finance Corp Ltd v Williams Furniture Ltd (No 2) [1980] 1 All ER 393 ............. 16.470 Beloff v Pressdram Ltd [1973] 1 All ER 241 ................................................ 8.260, 8.2730 Bennett v Minister of Community Welfare (1992) 176 CLR 408 ................................ 6.450 Bennetts v Board of Fire Commissioners of New South Wales (1967) 87 WN (Pt 1) (NSW) 307.................................................................................... 13.960 Berlei-Hestia (NZ) Ltd v Fernyhough [1980] 2 NZLR 150 ........................................ 13.980 Berlei Hestia Industries Ltd v Bali Co Inc (1973) 129 CLR 353................................... 8.2400 Beswick v Beswick [1968] AC 58...................................................................... 2.765 Bettini v Gye (1876) 1 QBD 183 ......................................................................... 2.611 Birtchnell v Equity Trustees, Executors & Agency Co Ltd (1929) 42 CLR 384 ................. 9.160 Bisan Ltd v Cellante (2002) 173 FLR 310 ..................................................... 11.120, 11.150 Blackney v Clark [2013] NSWDC 144 ................................................................. 6.340 Blackwell v Wadsworth (1982) 64 FLR 145 .................................................. 8.40, 8.300 Blake v JR Perry Pty Ltd [2012] VSCA 122............................................................ 6.620 Bodney v Bennell (2008) 167 FCR 84; [2008] FCAFC 63 .......................................... 1.260 Bodum v DKSH Australia Pty Ltd (2011) 280 ALR 639; [2011] FCAFC 98....................... 13.765 Bojczuk v Gregorcewicz [1961] SASR 128 ............................................................ 2.451 Bolton v Stone [1951] AC 850.......................................................................... 6.410 Bond Brewing Holdings Ltd v National Australia Bank Ltd [1991] 1 VR 386 ................. 19.380 Boral Bricks Pty Limited v Cosmidis (No 2) [2014] NSWCA 139 ................................. 6.890 Boral Bricks Pty Ltd v Cosmidis (No 2) [2014] NSWCA 139 ....................................... 6.720 Borland’s Trustee v Steel Bros & Co Ltd [1901] 1 Ch 279.......................................... 14.40 Boston Deep Sea Fishing & Ice Co v Ansell (1888) LR 39 Ch D 339 ........................... 13.1180 Bothranch Pty Ltd v Monitronix Ltd (1989) 7 ACLC 443.......................................... 14.80 Boulton v Jones (1857) 2 H & N 564; 157 ER 232 ..................................................... 3.72 Bourhill v Young [1943] AC 92 ........................................................................ 6.390 Bradken Resources Pty Ltd v Lynx Engineering Consultants Pty Ltd (2012) 210 FCR 21 ...................................................................................... 8.1890, 8.2020 Bradley Egg Farm Ltd v Clifford [1943] 2 All ER 378............................................... 9.290 Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 .......................... 2.151 Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1990) 9 ACLC 324 ................................................................................... 12.100, 12.170, 12.190 Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1991) 10 ACLC 253 ........................................................................................... 12.190, 12.290 Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279 .. 10.220, 12.100 Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549 ............................. 9.940, 9.950 Bright Pine Mills Pty Ltd, Re [1969] VR 1002....................................................... 14.520 Brightwell v RFB Holdings Pty Ltd (in liq) (2003) 171 FLR 464......................... 14.410, 14.420 xii

Table of Cases

Bristol-Myers Co v Beecham Group Ltd [1974] AC 646.......................................... 8.1920 Bristol-Myers Company’s Application, Re [1969] RPC 146...................................... 8.1890 Bristol-Myers Squibb Co v FH Faulding & Co Ltd (2000) 97 FCR 524.......................... 8.1830 Brogden v Metropolitan Railway Co [1887] 2 App Cas 666....................................... 2.135 Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36 ...................................................................................................... 6.560 Brooks v Burns Philp Trustee Co Ltd (1969) 121 CLR 432 ......................................... 3.320 Brunninghausen v Glavanics (1999) 46 NSWLR 538 ............................................. 14.240 Bryan v Maloney (1995) 182 CLR 609 ....................................................... 6.330, 6.560 Buckland v Massey [1985] 1 Qd R 502................................................................ 3.295 Buckley v Tutty (1971) 125 CLR 353.................................................................... 3.355 Burge v Swarbrick (2007) 232 CLR 336...................................................... 8.190, 8.200 Burmic Pty Ltd v Goldview Pty Ltd [2003] 2 Qd R 477 ............................................ 3.293 Burnie Port Authority v General Jones Pty Ltd (1994) 179 CLR 520............................ 6.660 Burton v Palmer [1980] 2 NSWLR 878.............................................................. 16.470 Burwood Council v Byrnes [2002] NSWCA 343 .................................................... 6.830 Byrne & Co v Leon Van Tienhoven & Co (1880) 5 CPD 344........................................ 2.101

C CCOM Pty Ltd v Jiejing Pty Ltd (1994) 51 FCR 260................................................ 8.1850 CSR Ltd v Casaron Pty Ltd [2002] QSC 21 ........................................................... 4.540 CSR Ltd, Re (2010) 183 FCR 358 ............................................................. 16.140, 16.145 Cadbury Schweppes Pty Ltd v Pub Squash Co Pty Ltd [1980] 2 NSWLR 851................ 8.2580 Caj Amadio Constructions Pty Ltd v Kitchen (1991) 23 IPR 284................................. 8.1130 Caltex Oil (Aust) Pty Ltd v The Dredge “Willemstad” (1976) 136 CLR 529.................... 6.490 Camelot Resources Ltd v MacDonald (1994) 14 ACSR 437 .......................... 13.1340, 13.1350 Cameron v Hogan (1934) 51 CLR 358 ........................................................ 9.300, 9.510 Cammell, Laird & Co v Manganese Bronze & Brass Co [1934] AC 402......................... 4.640 Campbell v Hay [2014] NSWCA 129 .................................................................. 6.860 Cannon Street Pty Ltd v Karedis [2004] QSC 104................................................. 14.430 Canny Gabriel Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321..................................................................................... 9.90 Cantarella Bros Pty Ltd v Modena Trading Pty Ltd (2014) 254 CLR 337 ...................... 8.2245 Caparo Industries v Dickman [1990] 1 All ER 568.................................................. 6.540 Capricornia Credit Union Ltd v ASIC [2007] FCAFC 112 .......................................... 10.200 Carabelas v Scott (2003) 177 FLR 334.............................................................. 13.1420 Carew-Reid v The Public Trustee (1996) 14 ACLC 1106 ............................................ 14.85 Carey v Korda [2012] 45 WAR 181 ..................................................................... 19.80 Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256.............................................. 2.45, 2.152 Carlton Cricket & Football Social Club v Joseph [1970] VR 487......................... 9.280, 9.290 Carpenter v Pioneer Park Pty Ltd (in liq) (2004) 51 ACSR 245.................................. 14.420 Cassar v Crime Commission (NSW) [2014] NSWCA 356............................................. 7.15 Cassidy v Ministry of Health [1951] 2 KB 343 ....................................................... 6.620 Castlemaine Tooheys Ltd v Williams & Hodgson Transport Pty Ltd (1986) 162 CLR 395 ............................................................................................... 5.380 Catnic Components Ltd v Hill & Smith Ltd [1982] RPC 183 ...................................... 8.2110 Causer v Browne [1952] VLR 1 ......................................................................... 2.681 Caveat Pty Ltd v Baillie (2002) 21 ACLC 42 ......................................................... 14.350 Celtic Capital Pty Ltd v Cityview Corporation Ltd [2010] WASC 357 ........................... 15.135 Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130..................... 2.411 Centro and ASIC v Rich (2009) 236 FLR 1........................................................... 13.765 Cescastle Pty Ltd v Renak Holdings Ltd (1991) 9 ACLC 1333 .................................... 14.350 Chan v Zacharia (1984) 154 CLR 178 .................................................................. 9.160 Chaplin v Hicks [1911] 2 KB 786 ........................................................................ 3.641 Chapman v E-Sports Club Worldwide Ltd (2001) 19 ACLC 213......................... 14.410, 14.430 Chappell & Co Ltd v Nestlé Co Ltd [1960] AC 87 ................................................... 2.375 xiii

Business and Corporate Law

Charlton v Baber (2003) 47 ACSR 31 ............................................. 14.420, 14.430, 14.470 Charterbridge Corp Ltd v Lloyds Bank Ltd [1970] Ch 62 ........................................ 13.950 Chen v Butterfield (1996) 7 NZCLC 261,086 ........................................................ 9.940 Chew v The Queen (1992) 173 CLR 626 ............................................................ 13.1240 Chew Investment Australia Pty Ltd v General Corporation of Australia Ltd (1987) 6 ACLC 87 .................................................................................... 11.320 Chiarabaglio v Westpac [1991] ATPR 46-067........................................................ 3.145 Childrens Television Workshop Inc v Woolworths (NSW) Ltd [1981] 1 NSWLR 273 .................................................................................................... 8.2610 Chinese Cultural Club Limited, Re (2004) 183 FLR 33............................................. 11.320 Chitts v Allaine [1982] Qd R 319 ....................................................................... 3.292 Christie Owen & Davies Ltd v Rapacioli [1974] QB 781 ............................................ 7.175 Circle Petroleum (Qld) Pty Ltd v Greenslade (1998) 16 ACLC 1577 ................... 13.540, 13.670 City Equitable Fire Insurance Co Ltd, Re [1925] Ch 407 ....................... 13.610, 13.612, 13.1410 Claremont Petroleum NL v Cummings (1992) 10 ACLC 1,685................................... 13.660 Clarendon Homes (Aust) Pty Ltd v Henley Arch Pty Ltd (1999) 46 IPR 309 .................. 8.180 Clarkson, Booker Ltd v Andjel [1964] 2 QB 775 ..................................................... 7.182 Coca-Cola Trade Marks [1986] 1 WLR 695 ......................................................... 8.2190 Coco v AN Clark (Engineers) Ltd [1969] RPC 41 .................................................. 8.2720 Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 ..... 3.320, 3.555 Coe v Commonwealth (1979) 53 ALJR 403.......................................................... 1.260 Coffs Harbour Council v McLeod [2016] NSWCA 94 .............................................. 6.630 Coghlan v Pyoanee Pty Ltd [2003] 2 Qd R 636..................................................... 3.460 Cole v South Tweed Heads Rugby League Football Club (2004) 217 CLR 469; [2004] HCA 29........................................................................................ 6.610 Collins v Godefroy (1831) 1 B & Ad 950; 109 ER 1040............................................... 2.391 Colorado Products Pty Ltd (in provisional liq), Re (2014) 101 ACSR 233 [2014] NSWSC 789......................................................................................... 13.1078 Commerce Consolidated Pty Ltd v Johnstone [1976] VR 724..................................... 3.96 Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 ................................ 3.241 Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 ........................... 3.612, 3.615 Commonwealth v Australian Capital Territory [2013] HCA 55.................................... 1.180 Commonwealth v John Fairfax & Sons Ltd (1980) 147 CLR 39 ........................ 8.630, 8.2730 Commonwealth v McCormack (1984) 155 CLR 273 ................................................ 3.735 Commonwealth v Rocklea Spinning Mills Pty Ltd (2005) 145 FCR 220........................ 19.100 Commonwealth v Verwayen (1990) 170 CLR 394 .................................................. 2.413 Commonwealth v Yarmirr; Yarmirr v Northern Territory (2001) 208 CLR 1; [2001] HCA 56 ........................................................................................ 1.260 Commonwealth Bank of Australia Ltd v Friedrich (1991) 9 ACLC 946................ 13.610, 13.810 Commonwealth Bank of Australia Ltd v Perrin [2011] QSC 274 .................................. 7.135 Commonwealth Bank of Australia Ltd v TLI Management Pty Ltd [1990] VR 510 ...................................................................................................... 2.315 Compaction Systems Pty Ltd, Re [1976] 2 NSWLR 477 .......................................... 11.340 ConAgra Inc v McCain Foods (Aust) Pty Ltd (1992) 33 FCR 302 ............................... 8.2590 Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594; [1990] HCA 17 ................................................................................................. 5.582 Concrete Pty Ltd v Parramatta Design & Developments Pty Ltd (2006) 229 CLR 577 .............................................................................................. 8.1070 Consolidated Media Holdings Ltd, Re [2012] FCA 1186........................................... 11.220 Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985) 155 CLR 541 ................. 9.110 Cook v Cook (1986) 162 CLR 376 ..................................................................... 6.430 Cook v Deeks [1916] 1 AC 554.......................................... 13.1200, 13.1205, 13.1260, 14.270 Cook v Hawkes (2002) 35 MVR 391; [2002] NSWCA 79 ........................................... 6.710 Coombs v Dynasty Pty Ltd (1994) 14 ACSR 60............................................. 11.120, 11.130 Cope Allman (Marrickville) Ltd v Farrow (1984) 3 IPR 567 ...................................... 8.300 Cordiant Communications (Australia) Pty Ltd v Communications Group Holdings Pty Ltd (2005) 194 FLR 322 ............................................................ 11.320 Corporate Affairs Commission v Harvey [1980] VR 669......................................... 19.230 xiv

Table of Cases

Correa v Whittingham (No 3) [2012] NSWSC 526 ................................................. 12.130 CostaExchange Ltd, Re; Elkington v CostaExchange Ltd [2011] VSC 501............. 16.120, 16.125 Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 ................................ 2.720 Cox v Coulson [1916] 2 KB 177 .......................................................................... 9.90 Cox v Hickman (1860) 8 HL Cas 268; 11 ER 431 ...................................................... 9.90 Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR 72................................................................... 7.123, 12.210 Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438 ................ 3.520 Creasey v Breachwood Motors Ltd (1992) 10 ACLC 3,052 ....................................... 9.950 Credit Corporation Australia Pty Ltd v Atkins (1999) 17 ACLC 756 ............................ 13.800 Cribb v Korn (1911) 12 CLR 205......................................................................... 9.100 Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd [1945] AC 221 ..................................................................................... 3.551 Cumberland Holdings Ltd v Washington H Soul Pattinson & Co Ltd (1976) 1 ACLR 361............................................................................................. 14.760 Cundy v Lindsay (1877-78) LR 3 App Cas 459 ......................................................... 3.71 Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337 ..................................... 3.350 Curtis v Chemical Cleaning and Dyeing Co Ltd [1951] 1 KB 805.................................. 2.695 Cut Price Deli Pty Ltd v Jacques (1994) 49 FCR 397 ............................................. 8.2800 Czerwinski v Syrena Royal Pty Ltd (No 1) (2000) 18 ACLC 337 ................................. 14.350

D D & H Bunny Pty Ltd v Atkins [1961] VR 31 .......................................................... 9.140 DC Comics v Cheqout Pty Ltd (2013) 212 FCR 194 ................................................ 8.2345 DC of T v Clark (2003) 57 NSWLR 113.................................... 13.610, 13.800, 13.810, 13.840 DCT v Casualife Furniture International Pty Ltd (2004) 9 VR 549.............................. 14.810 DCT v Portinex Pty Ltd (2000) 34 ACSR 391........................................................ 11.320 DJE Constructions Pty Ltd v Maddocks [1982] 1 NSWLR 5...................................... 16.470 DVT Holdings Ltd v Bigshop.com.au Ltd (2002) 42 ACSR 378................................... 11.140 Damorgold Pty Ltd v JAI Products Pty Ltd (2015) 229 FCR 68 ................................. 8.1890 Daniels v Anderson (1995) 37 NSWLR 438 .......... 12.300, 13.510, 13.540, 13.582, 13.590, 13.620, 13.640, 13.670, 13.740 Daniels v Daniels [1978] 2 WLR 73................................................................... 14.260 Darby, Re [1911] 1 KB 95................................................................................ 9.950 Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500.......................... 2.705 Dart Industries Inc v Decor Corp Pty Ltd (1993) 179 CLR 101.................................... 8.2120 Darvall v North Sydney Brick & Tile Co Ltd (1988) 6 ACLC 154 ................................. 13.920 Darvall v North Sydney Brick & Tile Co Ltd (1989) 15 ACLR 230................................ 16.450 Data Access Corpn v Powerflex Services Pty Ltd (1999) 202 CLR 1 ............................. 8.150 David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265............. 19.160 David Holdings Pty Ltd v Attorney General (1994) 49 FCR 211 .................................. 5.440 David Jones Ltd v Willis (1934) 52 CLR 110 .......................................................... 4.620 David Jones Ltd, Re [2014] FCA 530 ................................................................. 11.220 David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353...................................................................................................... 3.105 Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 ...................... 3.550 Day v O’Leary (1992) 57 SASR 206.................................................................... 3.627 De Francesco v Barnum (1890) 45 Ch D 430........................................................ 2.453 De Garis v Neville Jeffress Pidler Pty Ltd (1990) 37 FCR 99 ............................. 8.280, 8.640 De Lassalle v Guildford [1901] 2 KB 215............................................................... 2.591 Deatons Pty Ltd v Flew (1949) 79 CLR 370 .......................................................... 7.185 Dempster v Mallina Holdings Ltd (1994) 13 WAR 124............................................ 13.660 Dempster v National Companies & Securities Commission (1993) 9 WAR 215.............. 16.470 Dennis v Keep [2002] NSWCA 227 ................................................................... 6.830 Dennison Manufacturing Co v Monarch Marketing Systems Inc (1983) 66 ALR 265.................................................................................................... 8.1890 xv

Business and Corporate Law

Dernacourt Investments Pty Ltd, Re (1990) 20 NSWLR 588 ................................... 14.650 Derrick v Cheung (2001) 181 ALR 301 ................................................................ 6.830 Derry v Peek (1889) 14 App Cas 337 ................................................................. 6.500 Desktop Marketing Systems Pty Ltd v Telstra Corporation Ltd (2002) 119 FCR 491 ...................................................................................... 8.110, 8.120, 8.130 Devefi Pty Ltd v Mateffy Perl Nagy Pty Ltd (1993) 37 IPR 477........................ 8.1070, 8.1080 Deveraux Holdings Pty Ltd v Pelsart Resources NL (No 2) (1985) 4 ACLC 12................. 11.230 Dietrich v Dare (1980) 54 ALJR 388................................................................... 2.272 Digga Australia Pty Ltd v Norm Engineering Pty Ltd (2008) 166 FCR 268.................... 8.1770 Digital Pulse Pty Ltd v Harris (2002) 166 FLR 421 ................................................ 13.1240 Ding v Sylvania Waterways Ltd (1999) 46 NSWLR 424 .......................................... 10.190 Director of Public Prosecutions (Cth) v Northcote [2014] NSWCCA 26 ............ 13.280, 13.1285 Dobler v Kenneth Halverson (2007) 70 NSWLR 151; [2007] NSWCA 335 ...................... 6.870 Donoghue v Allied Newspapers Ltd [1938] 1 Ch 106.............................. 8.210, 8.220, 8.240 Donoghue v Stevenson [1932] AC 562 ...................................................... 6.250, 6.440 Drake Personnel Ltd v Beddison [1979] VR 13 ...................................................... 3.353 Duke Group Ltd (in liq) v Pilmer (1999) 73 SASR 64 ............................................. 13.1160 Dulhunty v J B Young Ltd (1975) 50 ALJR 150 ...................................................... 6.610 Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 ............... 3.671 Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847............................. 2.345 Duomatic Ltd, Re [1969] 2 Ch 365.......................................................... 10.200, 11.340 Dura-Post (Australia) Pty Ltd v Delnorth Pty Ltd (2009) 177 FCR 239........................ 8.2080 Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd [2014] VSCA 326 ............................................................................................. 17.170 Dynasty Pty Ltd v Coombs (1995) 59 FCR 122 ...................................................... 11.130 D’Arcy v Myriad Genetics Inc [2014] FCAFC 115 ................................................... 8.1840 D’Arcy v Myriad Genetics Inc (2015) 89 ALJR 924 ................................................ 8.1845

E E H Dey Pty Ltd (in liq) v Dey [1966] VR 464 ...................................................... 16.470 EJ Gallo Winery v Lion Nathan Australia Pty Ltd (2010) 241 CLR 144 ................ 8.2180, 8.2370 EMI Songs Australia Pty Ltd v Larrikin Music Publishing Pty Ltd (2011) 191 FCR 444..................................................................................................... 8.320 East West Promotions Pty Ltd, Re (1986) 4 ACLC 84 ............................................ 14.540 Eastern Express Pty Ltd v General Newspapers Ltd (1992) 35 FCR 43......................... 5.300 Eaton v Tricare (Country) Pty Ltd [2016] QCA 139................................................. 6.670 Ebrahimi v Westbourne Galleries Ltd [1973] AC 360.................. 10.90, 14.780, 14.785, 14.820 Eden Energy Ltd v Drivetrain USA Inc [2012] WASC 192 ......................................... 12.130 Edmonds v Blaina Furnaces Co (1887) 36 Ch D 215................................................. 17.50 Edsonic Pty Ltd v Cassidy (2010) 189 FCR 271 ...................................................... 8.260 Education Equity Pty Ltd v Austock Funds Management Ltd [2012] VSC 69.................. 5.581 Edwards v A-G (NSW) (2004) 60 NSWLR 667 .................................................... 13.1420 Edwards v Skyways Ltd [1964] 1 WLR 349 .................................................. 2.281, 2.305 Elder Smith Goldsbrough Mort Ltd v McBride [1976] 2 NSWLR 631 ............................ 2.701 Elders Trustee and Executor Co Ltd v E G Reeves Pty Ltd (1987) 78 ALR 193 ............... 13.340 Eliason v Henshaw 17 US (4 Wheat) 225 (1819) ..................................................... 2.143 Elizabeth City Centre Pty Ltd v Corralyn Pty Ltd (1995) 63 SASR 235 .......................... 2.205 Elliott v ASIC (2004) 10 VR 369 ................................ 13.280, 13.480, 13.800, 13.830, 13.840 Ellul v Oakes (1972) 3 SASR 377 ....................................................................... 2.595 Emlen Pty Ltd v St Barbara Mines Ltd (1997) 15 ACLC 1107 ..................................... 14.720 Environment Protection Authority v Caltex Refining Co Pty Ltd (1993) 178 CLR 477 .................................................................................................... 12.390 Equitable Fire Insurance Co [1925] 1 Ch 407 ....................................................... 13.590 Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50 . 7.101, 9.970, 12.30, 13.940, 13.950 Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471..................... 2.570 xvi

Table of Cases

Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 ............ 2.220, 2.275 Ernest v Nicholls (1857) 6 HL Cas 401 ............................................................... 12.260 Ertel Bieber & Co v Rio Tinto Co Ltd [1918] AC 260 ................................................ 3.552 Erven Warnink v J Townend & Sons (Hull) Ltd [1979] AC 731 .................................. 8.2560 Esanda Finance Corporation v Peat Marwick Hungerfords (1997) 71 ALJR 448 ............. 6.540 Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 .................... 3.335 Esso Petroleum Co Ltd v Mardon [1976] QB 801 ................................................... 3.142 Eveready Australia Pty Ltd v Gillette Australia Pty Ltd [2000] ATPR 41-751; [1999] FCA 1824...................................................................................... 5.585 Expile Pty Ltd v Jabb’s Excavations Pty Ltd (2004) 22 ACLC 667 .............................. 19.100

F Facton Ltd v Erdogan (No 1) (2012) 99 IPR 46..................................................... 8.1210 Facton Ltd v Toast Sales Group Pty Ltd (2012) 205 FCR 378 .................................... 8.1160 Fairfax Media Publications Pty Ltd v Reed International Books Australia Pty Ltd (2010) 189 FCR 109 .............................................................................. 8.90 Falko v James McEwan & Co Pty Ltd [1977] VR 447 ............................................... 3.651 Fallas v Mourlas (2006) 65 NSWLR 418; [2006] NSWCA 32...................................... 6.850 Falvo v Australian Oztag Sports Association [2006] Aust Torts Reports 81-831; [2006] NSWCA 17 ................................................................................... 6.840 Farmers’ Co-operative Executors & Trustees Ltd v Perks (1989) 52 SASR 399............... 3.205 Farrow Finance Co Ltd (in liq) v Farrow Properties Pty Ltd (in liq) [1999] 1 VR 584.................................................................................................... 13.950 Fejo v Northern Territory (1998) 195 CLR 96........................................................ 1.260 Felthouse v Bindley (1862) 142 ER 1037 .............................................................. 2.153 Fermiscan Pty Ltd v James (2009) 261 ALR 408 ................................................... 3.670 Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672..................... 13.1200, 14.580 Fiore v Carlton Football Club Ltd (2002) 21 ACLC 145............................................. 11.160 Firmin v Gray & Co Pty Ltd [1985] 1 Qd R 160...................................................... 16.470 Fisher v Bell [1961] 1 QB 394..................................................... 1.450, 1.480, 1.500, 2.55 Fitzgerald v FJ Leohhandt Pty Ltd (1997) 189 CLR 215 ............................................ 3.280 Fitzsimmons v The Queen (1997) 15 ACLC 666................................................... 13.1160 Foakes v Beer (1884) 9 App Cas 605................................................................. 2.394 Folkes v King [1923] 1 KB 282.......................................................................... 4.370 Forkserve Pty Ltd v Jack and Aussie Forklift Repairs Pty Ltd (2001) 19 ACLC 299 ................................................................................................... 13.1220 Forrest v ASIC; Fortescue Metals Group Ltd v ASIC [2012] HCA 39................... 13.620, 13.622 Forrest v Australian Securities and Investments Commission [2012] HCA 39 .................. 2.20 Foss v Harbottle (1843) 2 Hare 461; 67 ER 189 .................................................... 14.390 Foster v Mountford and Rigby Ltd (1977) 14 ALR 71............................................. 8.2700 Fox v Gadsden Pty Ltd (2003) 46 ACSR 713........................................................ 13.300 Francis Day & Hunter Ltd v Bron [1963] Ch 587.................................................... 8.320 Fraser v NRMA Ltd (1995) 55 FCR 452............................................................... 11.230 Fraser v Thames Television [1984] 1 QB 44 ........................................................ 8.2710 Freeman v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 .......................... 7.121 Fry v Oddy [1998] VSCA 26............................................................................. 9.210 Fry Consulting Pty Ltd v Sports Warehouse Inc (No 2) (2012) 201 FCR 565.................. 8.2345 Furs Ltd v Tomkies (1936) 54 CLR 583......................................... 13.1160, 13.1180, 13.1300

G G Jeffery (Mens Store) Pty Ltd, Re (1984) 2 ACLC 421........................................... 14.630 Gala v Preston (1991) 172 CLR 243 .................................................................... 6.720 Galaxy Electronics Pty Ltd v Sega Enterprises Ltd (1997) 75 FCR 8 ............................ 8.840 Gamble & Mann v Hoffman (1997) 15 ACLC 1314 ................................................. 13.670 xvii

Business and Corporate Law

Gambotto v WCP Ltd (1995) 182 CLR 432 .. 10.200, 13.260, 14.40, 14.220, 14.280, 14.295, 14.300, 14.550, 14.730, 15.20 Gammasonics Institute for Medical Research Pty Ltd v Comrad Medical Systems Pty Ltd (2010) 77 NSWLR 479; [2010] NSWSC 267.................................. 4.100 Garcia v National Australia Bank Ltd (1998) 194 CLR 395 ........................................ 3.245 Geipel v Smith (1872) LR 7 QB 404 .................................................................... 3.515 Gemstone Corporation of Australia Ltd v Grasso (1994) 62 SASR 239 ...................... 13.1200 General Rolling Stock Co, Re (1872) 7 Ch App 646................................................ 19.210 Geneva Finance Ltd v Resource and Industry Ltd (2002) 169 FLR 152........................ 13.940 George Raymond Pty Ltd, Re (2000) 18 ACLC 85................................................. 14.570 Gerard Cassegrain & Co Pty Ltd (in liq) v Cassegrain [2013] NSWCA 455 .................... 13.1123 Gibbett v Forwood Products Pty Ltd [2001] FCA 290............................................. 4.630 Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd (1957) 59 SR (NSW) 122 ........................ 2.125 Gilford Motor Co Ltd v Horne [1933] Ch 935 ............................................... 3.330, 9.950 Giliberto v Kenny (1983) 48 ALR 620 ................................................................. 2.571 Giraffe World Australia Pty Ltd v ACCC [1999] ATPR 42,527 ..................................... 5.310 Gladstone Pacific Nickel Ltd, Re [2011] NSWSC 1235 ............................................. 14.435 Glasbrook Bros Ltd v Glamorgan County Council [1925] AC 270........................ 2.392, 2.405 Gold Ribbon (Accountants) P/L v Sheers (2005) 23 ACLC 1,288 ...................... 13.670, 13.760 Gold Ribbon (Accountants) Pty Ltd (in liq) v Sheers [2006] QCA 335 ........................ 13.670 Goldberg v Jenkins (1889) 15 VLR 36 ................................................................. 9.110 Golden Editions Pty Ltd v Polygram Pty Ltd (1996) 61 FCR 479....................... 8.1150, 8.1230 Golden Gate Petroleum Ltd, Re (2010) 77 ACSR 17 ............................................... 18.100 Goldsbrough, Mort & Co Ltd v Quinn (1910) 10 CLR 674.......................................... 2.102 Google v Australian Consumer and Competition Commission (2013) 249 CLR 435; [2013] HCA 1 .................................................................................... 5.584 Goozee v Graphic World Group Holdings Pty Ltd (2002) 170 FLR 451 ........................ 14.430 Gordon v Tamworth Jockey Club Inc [2003] Aust Torts Reports 81-698...................... 6.620 Graham Barclay Oysters v Ryan (2002) 211 CLR 540 .............................................. 6.630 Grainger & Sons v Gough [1896] AC 325 .............................................................. 2.55 Grant v Australian Knitting Mills (1933) 50 CLR 387 ............................. 6.290, 6.380, 6.440 Grant v Australian Knitting Mills [1936] AC 85 ............................................ 4.640, 4.650 Grant Samuel Corporate Pty Ltd v Fletcher [2015] HCA 8 ........................................ 19.10 Gratton v Carlton Football Club Ltd (2004) 187 FLR 25........................................... 11.160 Green v Bestobell Industries Pty Ltd [1982] WAR 1..................................... 9.950, 13.1200 Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286................................................ 13.910 Gregor v British-Israel-World Federation (NSW) (2002) 41 ACSR 641......................... 14.800 Greig v Insole [1978] 1 WLR 302....................................................................... 2.782 Griffin, Re; ex parte Board of Trade (1890) 60 LJQB 235 .......................................... 9.90 Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6 ........................................ 13.190 Ground & Foundation Supports Pty Ltd v GFS Management Services Pty Ltd (2003) 21 ACLC 506 ................................................................................ 14.670 Grove v Flavel (1986) 43 SASR 410 .................................................................. 13.940 Guerinoni v Argyle Concrete & Quarry Supplies Pty Ltd (1999) 34 ACSR 469............... 14.820

H H (restraint order), Re [1996] 2 All ER 391 .......................................................... 9.950 H Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] 1 QB 791.......................... 3.624 HPM Pty Ltd v Fear (2002) 171 FLR 12 ............................................................... 14.455 Hackshaw v Shaw (1984) 155 CLR 614....................................................... 6.410, 6.590 Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145................................. 3.621, 3.622, 3.625 Halal Certification Authority Pty Ltd v Scadilone Pty Ltd (2014) 107 IPR 23 ................. 8.2455 Haley v London Electricity Board [1965] AC 778................................................... 6.380 Hamerhaven Pty Ltd v Ogge [1996] 2 VR 488 ...................................................... 9.190 Hamilton v Lethbridge (1912) 14 CLR 236............................................................ 2.454 Hanel v O’Neill (2003) 180 FLR 360................................................................... 9.220 xviii

Table of Cases

Hardcastle v Advanced Mining Technologies Pty Ltd [2001] FCA 1846....................... 13.300 Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483................................................................................ 13.750, 13.1060 Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298 ............................................ 13.1240 Hart v O’Connor [1985] AC 1000 ...................................................................... 2.510 Hartigan v International Society for Krishna Consciousness Inc [2002] NSWSC 810...................................................................................................... 3.192 Hartley v Ponsonby (1857) 7 E & B 872; 119 ER 1471 ............................................... 2.405 Harvey v Harvey (1970) 120 CLR 529 ................................................................. 9.180 Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298 ................... 3.170 Hawkes & Son (London) Ltd v Paramount Film Service Ltd [1934] 1 Ch 593 ................. 8.320 Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd [1969] 2 NSWR 782.................................................................................................... 19.390 Hawkins v Clayton (1988) 166 CLR 539 .............................................................. 6.550 Haylen v New South Wales Rugby Union Ltd [2002] NSWSC 114 ............................... 6.410 Health World Ltd v Sin-Shun Australia Pty Ltd (2010) 240 CLR 590........................... 8.2360 Heaton v Richards (1881) 2 LR (NSW) 73 ............................................................ 2.335 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 ........................ 6.500, 18.320 Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549......................... 7.105, 7.122, 12.190, 12.210 Henderson v Pioneer Homes Pty Ltd (1980) 29 ALR 597......................................... 5.585 Henderson v Radio Corp Pty Ltd (1960) 60 SR (NSW) 576..................................... 8.2650 Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd [1989] 89 ALR 539; [1989] FCA 246 ....................................................................................... 5.581 Herbert Morris Ltd v Saxelby [1916] AC 688........................................................ 3.352 Hermann v Charlesworth [1905] 2 KB 123........................................................... 3.385 Herne Bay Steamboat Co v Hutton [1903] 2 KB 683 .............................................. 3.554 Herrman v Simon (1990) 8 ACLC 1,094 ............................................................. 11.340 Hickman v Kent or Romney Marsh Sheep-Breeders’ Association [1915] 1 Ch 881 .................................................................................................... 10.250 Hickman v Kent or Romney Marsh Sheep-breeders Association [1915] 1 Ch 881 ........... 14.380 Hill v Van Erp (1997) 188 CLR 159 ..................................................................... 6.350 Hinchliff v Abu-Dabat (1998) 41 IPR 400 ............................................................ 8.1110 Hirachand Punamchand v Temple [1911] 2 KB 330................................................. 2.396 Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] 1 All ER 350 ....................... 13.1220 Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] Ch 169................................ 3.351 Hochester v De La Tour (1853) 2 E & B 678; 118 ER 922............................................ 3.531 Hogan v Koala Dundee Pty Ltd (1988) 20 FCR 314 ............................................... 8.2620 Hogan v Koala Dundee Pty Ltd (1988) ATPR 40-902.............................................. 5.585 Hogg v Cramphorn Ltd [1967] Ch 254 ............................................................. 13.1390 Holmes v Jones (1907) 4 CLR 1692 .................................................................... 3.125 Honey v Australian Airlines Ltd (1989) 14 IPR 264 ............................................... 8.2670 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 .... 2.580, 13.340 Howard v Mechtler (1999) 17 ACLC 632 ............................................................. 11.120 Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821........................... 13.1060, 13.1070 Howe v Teefy (1927) 27 SR (NSW) 301 ...................................................... 3.645, 3.660 Hoyts Pty Ltd v Burns (2003) 77 ALJR 1934......................................................... 6.820 Hoyt’s Pty Ltd v Spencer (1919) 27 CLR 133 ................................................. 2.575, 2.592 Hubbard v Vosper [1972] 2 QB 84 ............................................................ 8.610, 8.620 Hudgell Yeates & Co v Watson [1978] QB 451...................................................... 9.200 Hudson Crushed Metals Pty Ltd v Henry [1985] 1 Qd R 202 ...................................... 3.541 Humes Ltd v Unity APA Ltd (No 1) [1987] VR 467 ................................................. 11.140 Hungerfords v Walker (1989) 171 CLR 125 .......................................................... 9.940 Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd (2013) 247 CLR 613 ............ 6.450 Hunter & New England Local Health District v McKenna & Simon [2014] HCA 44 ...................................................................................................... 6.870 Hurley v McDonald’s Australia Ltd [2000] ATPR 41-741........................................... 2.265 Hurley v McDonald’s Australia [1999] FCA 1728 ................................................... 5.590 Hurley v NCSC (1993) 11 ACLC 443................................................................... 13.660 xix

Business and Corporate Law

Hyde v Wrench (1840) 49 ER 132 ...................................................................... 2.170 Hydrocool Pty Ltd v Hepburn (No 4) [2011] FCA 495............................................ 13.1255

I IMF (Australia) Ltd v Sons of Gwalia Ltd (Administrator Appointed) (2005) 143 FCR 274 ................................................................................................ 14.76 IWave Pty Ltd v Break O’Day Business Enterprise Board Inc [2004] TASSC 43 .............. 9.330 IceTV Pty Ltd v Nine Network Australia Pty Ltd (2009) 239 CLR 458................... 8.120, 8.130 Imbree v McNeilly (2008) 236 CLR 510; [2008] HCA 40 .......................................... 6.430 Immigration, Minister for v Ah Hin Teoh (1995) 183 CLR 273 .................................... 1.560 Incat Australia Pty Ltd v ASIC (2000) 33 ACSR 462 ............................................... 9.680 Independent Quarries Pty Ltd, Re (1993) 12 ACLC 159 ........................................... 14.100 Industrial Equity Ltd v Blackburn (1977) 137 CLR 567 ............................................. 9.970 Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (No 6) (2007) 63 ACSR 1 ................................................................................ 18.320 International Business Machines Corp v Commissioner of Patents (1991) 33 FCR 218............................................................................................... 8.1850 International Harvester Co of Australia Pty Ltd v Carrigan’s Hazeldene Pastoral Co (1958) 100 CLR 644..................................................................... 7.10 Interstate Parcel Express Co Pty Ltd v Time-Life International (Nederlands) BV (1977) 138 CLR 534 ......................................................................... 8.490, 8.500 Isak Constructions (Aust) Pty Ltd v Faress (2003) 47 ACSR 224...................... 14.420, 14.430

J JJ Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435 .................................. 2.593, 2.595 Jaensch v Coffey (1984) 155 CLR 549 ................................................................ 6.370 Japan Abrasive Materials Pty Ltd v Australian Fused Materials Pty Ltd (1998) 16 ACLC 1172......................................................................................... 13.980 Jarvis v Swan Tours Ltd [1972] 3 WLR 954 .......................................................... 3.652 Jeffree v NCSC [1990] WAR 183..................................................................... 13.1240 Jenkins v Bennett [1965] WAR 42 .................................................................... 9.200 John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113.......................................... 13.50 Johnson v Buttress (1936) 56 CLR 113 ................................................................ 3.201 Johnson Tiles Pty Ltd v Esso Australia Pty Ltd [2003] Aust Torts Reports 81-692; [2003] VSC 27 .............................................................................. 6.490 Jones v Vernon Pools Ltd [1938] 2 All ER 626 ...................................................... 2.283 Jordan v Avram (1997) 141 FLR 275 ......................................................... 11.320, 11.330

K Karam v Australia & New Zealand Banking Group Ltd (2000) 18 ACLC 590 ........ 14.410, 14.430 Karpany v Dietman (2013) 252 CLR 507; [2013] HCA 47 ........................................... 1.260 Kay’s Leasing Corporation Pty Ltd v Fletcher (1964) 116 CLR 124 ............................... 3.755 Kayteal Pty Ltd v Dignan [2011] NSWSC 197 ........................................................ 6.920 Keenfern Pty Ltd v Thorlock International Ltd (2002) 20 ACLC 1,322 ......................... 14.350 Keighley, Maxsted & Co v Durant [1901] AC 240.................................................... 7.131 Keller v Holderman 11 Mich 248 (1863)............................................................... 2.231 Keller v LED Technologies Pty Ltd (2010) 185 FCR 449.......................................... 8.1600 Kelly v Kelly (1990) 64 ALJR 234 ...................................................................... 9.170 Kelner v Baxter (1866) LR 2 CP 174.................................................................... 7.181 Kempsey Shire Council v Slade [2015] NSWLEC 135............................................... 9.950 Kendall v Hamilton (1879) 4 App Cas 504 ........................................................... 9.120 Kenna & Brown Pty Ltd v Kenna (1999) 17 ACLC 1183................................. 13.800, 13.1420 Keyrate Pty Ltd v Hamarc Pty Ltd (2001) 38 ACSR 396.......................................... 14.430 xx

Table of Cases

Kiama Constructions v MC Casella Building Co Pty Ltd (1980) 10 IPR 345.................... 8.1150 Kimberly-Clark Australia Pty Ltd v Multigate Medical Products Pty Ltd (2011) 92 IPR 21 .............................................................................................. 8.2110 King v Philcox [2015] HCA 19 .......................................................................... 6.910 Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 ..... 12.30, 13.940, 13.1300, 13.1400 Kleinwort Benson Ltd v Malaysia Mining Corporation Bhd [1988] 1 WLR 799 ................ 2.311 Knight v Maclean [2002] NSWCA 314................................................................ 6.830 Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd [2014] SASCFC 103 ................ 12.60 Knott Investments Pty Ltd v Winnebago Industries Inc (2013) 211 FCR 449................. 8.2362 Kokotovich Constructions Pty Ltd v Wallington (1995) 13 ACLC 1113.... 13.1060, 13.1075, 14.790, 15.130 Koninklijke Philips Electronics NV v Remington Products Australia Pty Ltd (2000) 100 FCR 90 ................................................................................. 8.2390 Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115 ...................................................................................................... 3.605 Koorootang Nominees Pty Ltd v Australia & New Zealand Banking Group Ltd [1998] 3 VR 16............................................................................... 12.140, 12.170 Koufos v Czarnikow Ltd [1969] 1 AC 350 ............................................................ 3.626 Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563......................................... 3.110 Krecichwost v The Queen [2012] NSWCCA 101................................................... 13.1280 Krell v Henry [1903] 2 KB 740.......................................................................... 3.553 Kucharski v Air Pacific Ltd [2011] NSWCTTT 555 ................................................... 5.930 Kwok v The Queen (2007) 64 ACSR 307 ................................................. 13.500, 13.1280

L L Shaddock & Associates Pty Ltd v Parramatta City Council (No 1) (1981) 150 CLR 225............................................................................................... 18.320 LED Builders Pty Ltd v Eagle Homes Pty Ltd (1999) 44 IPR 24.................................. 8.1170 LED Technologies Pty Ltd v Elecspess Pty Ltd (2008) 80 IPR 85 .................... 8.1600, 8.1650 L’Estrange v F Graucob Ltd [1934] 2 KB 394 ........................................................ 2.671 LJ Hooker Ltd v WJ Adams Estates Pty Ltd (1977) 138 CLR 52.................................... 7.171 LK Bros Pty Ltd v Collins [2004] QSC 026 .......................................... 12.80, 12.150, 12.210 Ladbroke (Football) Ltd v William Hill (Football) Ltd [1964] 1 WLR 273........ 8.80, 8.100, 8.320 Lafranchi v Transport Accident Commission (2006) 14 VR 359; [2006] VSCA 81............. 6.340 Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392....................................... 13.530 Lam Soon Australia Pty Ltd (admin apptd) v Molit (No 55) Pty Ltd (1996) 70 FCR 34 ................................................................................................ 19.100 Law v Law [1905] 1 Ch 140 ............................................................................. 9.160 Le Mans Grand Prix Circuits Pty Ltd v Iliadis [1998] 4 VR 661.................................... 2.285 Leaf v International Galleries [1950] 2 KB 86 ........................................................ 3.42 Leaney v Olmstead Pty Ltd (1994) 51 FCR 240 .................................................... 14.100 Leda Pty Ltd v Weerden [2006] NSWSC 125........................................................ 6.530 Lehman Brothers Holdings Inc v City of Swan (2010) 240 CLR 509 ........................... 19.100 Lemoto v Able Technical Pty Ltd (2005) 63 NSWLR 300; [2005] NSWCA 153 ................ 6.990 Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 ......................... 12.290 Leonard v Ielasi (1987) 46 SASR 495................................................................. 4.350 Levi v Colgate Palmolive (1941) 41 SR (NSW) 48................................................... 6.380 Levin v Clark [1962] NSWR 686...................................................................... 13.960 Lewis v Averay [1972] 1 QB 198................................................................. 3.74, 4.380 Liaweena (NSW) Pty Ltd v McWilliams Wines Pty Ltd [1991] ASC 56,616..................... 4.670 Lieng v Delvers (2002) 36 MVR 401 .................................................................. 6.830 Lindner v Murdock’s Garage (1950) 83 CLR 628 ................................................... 3.350 Linton v Telnet Pty Ltd (1999) 17 ACLC 619 .............................................. 13.940, 13.950 Lintrose Nominees Pty Ltd v King [1995] 1 VR 574 ................................................. 7.162 Lister v Romford Ice and Cold Storage Co Ltd [1957] AC 555................................... 13.520 Little and Australian Securities Commission, Re (1996) 14 ACLC 1,730 ........................ 9.840 xxi

Business and Corporate Law

Lloyd v Grace, Smith & Co [1912] AC 716 ............................................................. 7.184 Lloyd v Grace Smith & Co [1912] AC 716 ............................................................ 12.360 Lloyd’s Bank Ltd v Bundy [1975] QB 326............................................................. 3.235 Loch v John Blackwood Ltd [1924] AC 783 ........................................................ 14.810 Lockwood Security Products Pty Ltd v Doric Products Pty Ltd (No 2) (2007) 235 CLR 173.......................................................................................... 8.1900 Loftus v Roberts (1902) 18 TLR 532 .................................................................. 2.360 Lombardi v Holroyd City Council [2002] NSWCA 252 ............................................. 6.830 Louth v Diprose (1992) 175 CLR 621................................................................... 3.242 Lumley v Gye (1853) 2 El & Bl 216; 118 ER 749 ....................................................... 2.781 Ly v R (2014) 227 FCR 304; [2014] FCAFC 175 ...................................................... 8.1330 Lyford v Commonwealth Bank of Australia (1995) 13 ACLC 900 ................................ 12.30 Lyford v Media Portfolio Ltd (1989) 7 ACLC 271 .................................................... 12.90 Lyford & Glenisia Investments Pty Ltd v Commonwealth Bank of Australia (1995) 13 ACLC 900 ................................................................................ 13.940 Lynch v Stiff (1943) 68 CLR 428 ....................................................................... 9.150

M MD v Sydney Southwest Area Health Service [2009] NSWDC 24 .............................. 6.870 MDA National Ltd v Medical Defence Australia Ltd [2014] FCA 954........................... 11.220 MG Corrosion Consultants Pty Ltd v Gilmour [2014] FCA 990 ................................ 13.1078 MG Corrosion Consultants Pty Ltd v Vinciguerra [2011] FCAFC 31............................. 14.440 MIA Group Ltd, Re (2004) 50 ACSR 29 ............................................................. 13.1110 MJA Scientifics International Pty Ltd v SC Johnson & Son Pty Ltd (1998) 43 IPR 287................................................................................................ 8.2110 Mabo v Queensland (No 2) (1992) 175 CLR 1.................................................. 1.80, 1.230 Macaura v Northern Assurance Co Ltd [1925] AC 619.................................... 9.850, 9.910 Macleod v R (2003) 214 CLR 230 ..................................................................... 9.850 Maddocks v DJE Constructions Pty Ltd (1982) 148 CLR 104..................................... 15.100 Maggacis, Re [1994] 1 Qd R 59 ........................................................................ 9.510 Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 .............................. 8.2720 Mahmoud & Ispahani, Re [1921] 2 KB 716 ................................................... 3.291, 3.298 Majestic Resources NL v Caveat Pty Ltd [2004] WASCA 201 ................................... 14.350 Malam v Graysonline Rumbles Removals & Storage (General) [2012] NSWCTTT 197 ..................................................................................................... 5.930 Malos v Malos (2003) 44 ACSR 511 .................................................................. 14.790 Mamouney v Soliman (1992) 10 ACLC 1674 ........................................................ 14.730 Mander v O’Brien [1934] SASR 87 .................................................................... 8.100 Mann v Abruzzi Sports Club Ltd (1994) 12 ACLC 137............................................... 19.50 Manpac Industries Pty Ltd v Ceccatini (2002) 20 ACLC 1,304 .................................. 13.840 March v E & M H Stramare Pty Ltd (1991) 171 CLR 506 ........................................... 6.450 Marengo Mining Ltd (No 2), Re [2012] FCA 1498.................................................. 11.220 Markson v Cutler [2007] NSWSC 1515 ................................................................ 7.102 Maronis Holdings Ltd v Nippon Credit Australia Pty Ltd (2001) 38 ACSR 404............... 13.950 Marson Pty Ltd v Pressbank Pty Ltd [1990] 1 Qd R 264 .............................. 13.1200, 13.1250 Martin v Gale (1876) Ch D 428......................................................................... 2.470 Martyn v Gray (1863) 14 CB (NS) 824; 143 ER 667.................................................. 9.140 Massey v Wales (2003) 57 NSWLR 718 ............................................................... 13.50 Master Education Services Pty Ltd v Ketchell (2008) 236 CLR 101............................ 8.2790 Master Grocers’ Association of Victoria v Northern District Grocers Co-operative Ltd [1983] 1 VR 195.................................................................. 9.310 Masters v Cameron (1954) 91 CLR 353 ........................................................ 2.141, 2.142 Matthew Bros, Re [1962] VR 262 .................................................................... 19.210 McBride v Christie’s Australia Pty Ltd [2014] NSWSC 1729 ....................................... 7.164 McCarthy v Australian Rough Riders Association Inc [1988] ATPR 49,017 .................... 5.190 McCracken v Phoenix Constructions (Qld) Pty Ltd [2012] QCA 129 ........................... 14.720 xxii

Table of Cases

McFarlane v Daniell (1938) 38 SR (NSW) 337 ....................................................... 3.270 McLaughlin v Daily Telegraph Newspaper Co (No 2) (1904) 1 CLR 243 ........................ 14.80 McLaughlin v Dungowan Manly Pty Ltd [2010] NSWSC 187.................................... 10.260 McNamara v Flavel (1988) 13 ACLR 619 ................................................. 13.1250, 13.1255 McRae v Commonwealth Disposals Commission (1951) 84 CLR 377............................. 3.45 McWilliams Wines Pty Ltd v McDonald’s Systems of Australia Pty Ltd (1979) 41 FLR 429; [1979] FCA 16 ............................................................................. 5.583 Megevand, Re; Ex parte Delhasse (1878) 7 Ch D 511 ............................................... 9.90 Members of the Yorta Yorta Aboriginal Community v Victoria (2002) 214 CLR 422; [2002] HCA 58 .................................................................................. 1.260 Mendelson-Zeller Co Inc v T & C Providores Pty Ltd [1981] 1 NSWLR 366 ..................... 2.165 Menier v Hooper’s Telegraph Works (1874) 9 Ch App 350...................................... 14.270 Mercantile Credit Co Ltd v Garrod [1962] 3 All ER 1103 ............................................ 9.115 Mercantile Credits Ltd v F C Upton & Sons Pty Ltd (1974) 48 ALJR 301 ....................... 4.410 Mercantile Union Guarantee Corporation Ltd v Ball [1937] 2 KB 498.......................... 2.455 Meridian Global Funds Management Asia Ltd v Securities Commission (1995) 13 ACLC 3,245 .............................................................................. 12.340, 12.350 Meritt v Meritt [1970] 1 WLR 1211...................................................................... 2.241 Mesenberg v Cord Industrial Recruiters Pty Ltd (1996) 39 NSWLR 128 ...................... 14.720 Meskenas v ACP Publishing Pty Ltd (2006) 70 IPR 172 .......................................... 8.1520 Metrans Pty Ltd v Courtney-Smith (1983) 8 IR 379................................................ 3.330 Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699............ 13.800, 13.840, 13.842 Metyor Inc v Queensland Electronic Switching Pty Ltd [2003] 1 Qd R 186 .................. 14.430 Meyers Taylor Pty Ltd v Vicarr Industries Ltd (1977) 137 CLR 228 ............................. 8.1890 Microsoft Corpn v Ezy Loans Pty Ltd (2004) 63 IPR 54.......................................... 8.1190 Microsoft Corporation v Goodview Electronics Pty Ltd (1999) 46 IPR 159 .................. 8.1250 Milburn v Pivot Ltd (1997) 78 FCR 472.............................................................. 16.470 Miletich v Murchie [2012] FCA 1013................................................................... 5.585 Miller v Miller (2011) 242 CLR 446; [2011] HCA 9............................................ 6.710, 6.720 Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357; [2010] HCA 31 ................................................................ 5.585 Mills v Mills (1938) 60 CLR 150 ........................................ 13.400, 13.930, 13.1000, 13.1050 Milpurrurru v Indofurn Pty Ltd (1994) 54 FCR 240............................. 8.480, 8.1200, 8.1240 Minnesota Mining & Manufacturing Co v Beiersdorf (Aust) Ltd (1980) 144 CLR 253.................................................................................................... 8.1900 Mirror Newspapers Ltd v Queensland Newspapers Pty Ltd [1962] Qd R 305 ................ 8.100 Mitchell v Valherie (2005) 93 SASR 76................................................................ 3.110 Mitor Investments Pty Ltd v General Accident Fire & Life Assurance Corporation Ltd [1984] WAR 365 ................................................................. 7.165 Modbury Triangle Shopping Centre Pty Ltd v Anzil (2000) 205 CLR 254 ...................... 6.610 Mogul Stud Pty Ltd, Re [2012] NSWSC 1639......................................................... 14.72 Monitronix Ltd, Re (1987) 5 ACLC 1063 ............................................................. 15.130 Moorcock, The (1889) 14 PD 64....................................................................... 2.635 Moorgate Tobacco Co Ltd v Philip Morris Ltd (No 2) (1984) 156 CLR 414 ................... 8.2560 Moran v Moranco Enterprises Pty Ltd (1996) 14 ACLC 1669 .................................... 15.130 Mordecai v Mordecai (1988) 12 NSWLR 58 ....................................................... 13.1220 Morley v ASIC (2010) 81 ACSR 285; [2010] NSW CA 331.......................................... 13.380 Morris v Kanssen [1946] AC 459 ..................................................................... 12.230 Mortimer v Proto Resources & Investments Ltd [2015] FCA 654............................... 11.120 Mousell Bros Ltd v London & North Western Railway Co [1917] 2 KB 836................... 12.360 Movitor Pty Ltd (in liq), Re (1996) 64 FCR 380 ................................................... 19.280 Mulligan v Coffs Harbour City Council (2005) 80 ALJR 43; [2005] HCA 63.................... 6.630 Multisteps Pty Ltd v Source and Sell Pty Ltd (2013) 214 FCR 323 .............................. 8.1600 Mutual Finance Ltd v John Wetton & Sons Ltd [1937] 2 KB 389 ......................... 3.170, 3.191 Mutual Life & Citizens’ Assurance Co Ltd v Evatt (1968) 122 CLR 556 ......................... 6.500 Myers v Aquarell Pty Ltd (in liq) [2000] VSC 429 ................................. 12.80, 12.120, 12.150 xxiii

Business and Corporate Law

N NCR Australia Pty Ltd v Credit Connection Pty Ltd (in liq) [2004] NSWSC 1.................. 12.180 NE Perry Pty Ltd v Judge (2002) 84 SASR 86....................................................... 3.354 NP Generations Pty Ltd v Feneley (2001) 80 SASR 151 .......................................... 8.2760 NRMA v Bradley (2002) 42 ACSR 616 ............................................... 11.140, 11.320, 13.50 NRMA v Parker (1986) 6 NSWLR 517......................................................... 11.140, 13.50 NRMA v Parkin (2004) 60 NSWLR 224 .............................................................. 11.140 NRMA v Snodgrass (2002) 170 FLR 175..................................................... 11.140, 11.260 NRMA v Spragg (2001) 161 FLR 243 ......................................................... 11.140, 11.320 NRMA Association Ltd, Re [2003] FCAFC 206 ..................................................... 11.140 NRMA Association Ltd, Re; Lavercombe v Auscott Ltd (2006) 202 FLR 390................. 11.320 NRMA Ltd v Scandrett (2002) 171 FLR 232.................................................. 11.120, 11.140 NRMA Ltd v Snodgrass (2001) 37 ACSR 382 ...................................... 10.150, 11.120, 11.140 NRMA Ltd v Snodgrass (2001) 52 NSWLR 383............................................. 11.120, 11.140 NRMA Ltd (No 1), Re (2000) 156 FLR 349.......................................................... 14.280 NV Philips Gloeilampenfabrieken v Mirabella International Pty Ltd (1995) 183 CLR 655 .............................................................................................. 8.1810 Nagle v Feilden [1966] 2 QB 633...................................................................... 9.300 Nagler v H Volski & Co Pty Ltd (in liq) (No 2) (2001) 20 ACLC 431 .............................. 11.320 National Australia Bank Ltd v Perkins (1999) 17 ACLC 1,665 ............................ 12.110, 12.190 National Commercial Banking Corp of Australia Ltd v Batty (1986) 160 CLR 251............. 9.130 National Education Advancement Programs Pty Ltd v Ashton (1996) 14 ACLC 30....................................................................................................... 9.810 National Exchange Pty Ltd v ASIC (2004) 49 ACSR 369 ......................................... 13.765 National Research Development Corp v Commissioner of Patents (1959) 102 CLR 252 .............................................................................................. 8.1820 National Rugby League Investments Pty Ltd v Singtel Optus Pty Ltd (2012) 201 FCR 147 ............................................................................................... 8.960 Nemeth v Bayswater Road Pty Ltd [1988] 2 Qd R 406 ........................................... 2.582 Nesbit Evans Group Australia Pty Ltd v Impro Ltd (1997) 39 IPR 56........................... 8.2110 Network Ten Pty Ltd v TCN Channel Nine Pty Ltd (2004) 218 CLR 273 ........................ 8.930 New South Wales v Lepore (2003) 212 CLR 511 .................................................... 6.620 New South Wales v Lepore; Samin v Queensland; Rich v Queensland (2003) 212 CLR 511............................................................................................ 6.670 News Ltd v South Sydney District Rugby League Football Club Ltd [2003] ATPR 41-943 .......................................................................................... 5.180 Ngurli Ltd v McCann (1953) 90 CLR 425 ................................................. 13.1400, 14.260 Nicaro Holdings Pty Ltd v Martin Engineering Co (1990) 91 ALR 513 ......................... 8.1890 Niord Pty Ltd v Adelaide Petroleum NL (1990) 54 SASR 87..................................... 14.100 Noel Tedman Holdings Pty Ltd, Re [1967] Qd R 561 ...................................... 11.160, 11.170 Norcast S.ar.L v Bradken Ltd (No 2) (2013) 219 FCR 14; [2013] FCA 235......................... 5.125 Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535............... 3.345 North Australia Aboriginal Justice Agency Ltd v NT [2015] HCA 41 ............................. 1.550 North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] 1 QB 705 ....... 3.172, 3.180 North West Transportation Co Ltd v Beatty (1887) 12 App Cas 589.......................... 13.1300 Northern Territory v Mengel (1995) 185 CLR 307 .................................................. 6.610 Northern Territory of Australia v Collins (2008) 235 CLR 619 .................................. 8.2100 Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 ......... 12.140, 12.190, 12.220, 12.240, 12.250 Northwest Capital Management v Westate Capital Ltd [2012] WASC 121 ..................... 11.120 Nyulasy v Rowan (1891) 17 VLR 663 .................................................................. 2.235

O O Mustard & Son v Dosen [1964] 1 WLR 109 ...................................................... 8.2720 O’Brien v Sporting Shooters Association of Australia (Vic) [1999] 3 VR 251................... 14.76 xxiv

Table of Cases

O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 ........................... 3.675 O’Neill v Phillips [1999] 1 WLR 1092................................................................. 14.660 Oceanroutes (Aust) Pty Ltd v MC Lamond [1984] AIPC 90-134................................. 8.260 Ogawa v Spender (2006) 151 FCR 228 .............................................................. 8.1490 Olley v Marlborough Court Ltd [1949] 1 KB 532.................................................... 2.685 On the Street Pty Ltd v Cott (1990) 101 FLR 234 ................................................. 13.1220 Onslow Salt Pty Ltd, Re (2003) 45 ACSR 322....................................................... 15.130 Oris Funds Management Ltd v National Australia Bank Ltd [2003] VSC 315 ......... 12.90, 12.150 Oscar Chess Ltd v Williams [1957] 1 WLR 370............................................... 2.580, 2.581 Oswal v Burrup Fertilisers Pty Ltd (Receivers and Managers Appointed) [2013] FCAFC 9 .............................................................................................. 13.300 Overseas Tankship (UK) Ltd v Miller Steamship Co Pty Ltd [1967] 1 AC 617.................. 6.480 Overseas Tankship (UK) Ltd v Morts Dock Engineering Co Ltd [1961] AC 388............... 6.470 Overton Holdings Pty Ltd, Re [1985] WAR 224 ................................................... 14.530

P Pace v Antlers Pty Ltd (in liq) (1998) 80 FCR 485; 26 ACSR 490 ............................... 19.230 Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 ............................................ 12.110 Pacific Dunlop Ltd v Hogan (1989) 23 FCR 553 ................................................... 8.2620 Pacific Film Laboratories Pty Ltd v Commissioner of Taxation (1970) 121 CLR 154....................................................................................................... 8.40 Pacific Motor Auctions Pty Ltd v Motor Credits (Hire Finance) Pty Ltd (1965) 112 CLR 192 ........................................................................................... 4.400 Page One Records Ltd v Britton [1968] 1 WLR 157................................................. 3.691 Pan Foods Company Importers & Distributors Pty Ltd v Australian and New Zealand Banking Group Ltd (2000) 74 ALJR 791 ............................................... 3.520 Panayiotou v Sony Music Entertainment (UK) Ltd [1994] Ch 142............................... 3.357 Pancontinental Mining Ltd v Goldfields Ltd (1995) 13 ACLC 577 ............................... 18.120 Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711 .............................................................................. 12.220, 13.190 Papas v Bianca Investments Pty Ltd (2002) 82 SASR 581 .......................................... 3.75 Pape v Commissioner of Taxation (2009) 238 CLR 1; [2009] HCA 23............................ 1.190 Paris v Stepney Council [1951] AC 367 ............................................................... 6.420 Parke v Daily News Ltd [1962] Ch 927 ............................................ 13.970, 13.975, 14.270 Parker v South Eastern Railway Co (1877) 2 CPD 416 ............................................. 2.682 Parker v Tucker; Re Purcom No 34 Pty Ltd (In Liq) [2010] FCA 263 ........................... 13.590 Parkinson v College of Ambulance Ltd [1925] 2 KB 1 .............................................. 3.315 Pathirana v Pathirana [1967] 1 AC 233................................................................ 9.210 Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (No 3) (1998) 195 CLR 1......................................................................... 9.990, 9.1010 Patten v Thomas Motors Pty Ltd [1965] NSWR 1457 ............................................. 4.590 Paul A Davies (Aust) Pty Ltd (in liq) v P A Davies [1983] 1 NSWLR 440 ...................... 13.1190 Paul’s Retail Pty Ltd v Sports Leisure Pty Ltd (2012) 95 IPR 151................................ 8.2425 Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 ............................................. 3.741 Pavlides v Jensen [1956] Ch 565..................................................................... 14.260 Payzu Ltd v Saunders [1919] 2 KB 581................................................................ 3.635 Pearce v Brain [1929] 2 KB 310 ........................................................................ 2.465 Peckham v Moore [1975] 1 NSWLR 353 ............................................................. 9.290 Peek v Gurney (1873) LR 6 HL 377.............................................................. 3.121, 3.155 Pender v Lushington (1877) 6 Ch D 70 .................................................... 14.200, 14.380 Percival v Wright [1902] 2 Ch 421........................................................... 13.400, 13.870 Perez v Fernandez (2012) 260 FLR 1 ................................................................ 8.1470 Performing Right Society Ltd v Harlequin Record Shop Ltd [1979] 1 WLR 851............... 8.370 Perisher Blue Pty Limited v Nair-Smith [2015] NSWCA 90 ....................................... 6.440 Perkins v National Australia Bank Ltd (1999) 30 ACSR 256...................................... 12.190 Permanent Building Society v McGee (1993) 11 ACSR 260 ..................................... 13.1160 xxv

Business and Corporate Law

Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187 ......... 13.520, 13.590, 13.660, 13.1040 Permanent Building Society Ltd (in liq) v Wheeler (1994) 12 ACLC 674 ...................... 13.450 Perre v Apand Pty Ltd (1999) 198 CLR 180 ......................................................... 6.490 Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 .................................... 3.512 Petelin v Cullen (1975) 132 CLR 355 .................................................................... 3.92 Peter Pan Manufacturing Corp v Corsets Silhouette Ltd [1964] 1 WLR 96 .................. 8.2740 Peters v R (1998) 192 CLR 493 ....................................................................... 13.500 Peters v The Queen (1998) 192 CLR 493 ................................................ 13.1280, 13.1283 Peters’ American Delicacy Co Ltd v Heath (1939) 61 CLR 457 .................................. 14.240 Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401 ......................................................................................... 2.51 Phillips v Brooks [1919] 2 KB 243 ............................................................... 3.73, 4.380 Phonographic Performance Company of Australia Ltd v Cattch Pty Ltd (2013) 102 IPR 286........................................................................................... 8.1210 Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 ................................ 2.703 Pignatoro v Gilroy [1919] 1 KB 459 ................................................................... 4.300 Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165 ............................................ 13.1160 Pilmer v Roberts (1998) 150 ALR 235................................................................. 5.582 Pinnel’s Case (1602) 77 ER 237 ................................................ 2.393, 2.395, 2.397, 3.500 Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 254......................... 9.970 Pitt Son & Badgery Ltd v Proulefco SA (1984) 153 CLR 644 ..................................... 6.680 Planché v Colburn (1831) 8 Bing 14; 131 ER 305 ..................................................... 3.742 Polkinghorne v Holland (1934) 51 CLR 143........................................................... 9.130 Polo/Lauren Co LP v Ziliani Holdings Pty Ltd (2008) 173 FCR 266 ............................. 8.1760 Polo/Lauren Company LP v Ziliani Holdings Pty Ltd (2008) 173 FCR 266...................... 8.540 Polygram Records Pty Ltd v Monash Records (Aust) Pty Ltd (1985) 10 FCR 332 ........... 8.1250 Populin v HB Nominees Pty Ltd (1982) 41 ALR 471................................................ 8.2110 Pottie v Dunkley [2011] NSWSC 166................................................................. 14.430 Poulet Frais Pty Ltd v Silver Fox Company Pty Ltd (2005) 220 ALR 211.......................... 7.80 Powell v Fryer (2001) 159 FLR 433................................................................... 13.840 Powell v Lee (1908) 99 LT 284 ......................................................................... 2.145 Powell v Powell [1900] 1 Ch 243 ....................................................................... 3.192 Pozzebon (Trustee) v Australian Gaming and entertainment Ltd [2014] FCA 1032 ................................................................................................... 17.180 Praetorin Pty Ltd v TZ Ltd [2009] NSWSC 1237 ................................................... 14.355 Presidential Security Services of Australia Pty Ltd v Brilley [2008] NSWCA 204............ 12.360 Press v Mathers [1927] VLR 326 ........................................................................ 7.25 Property Force Consultants Pty Ltd, Re [1997] 1 Qd R 300 ..................................... 13.670 Prospect Industries Pty Ltd v Anscor Pty Ltd [2003] QSC 296 ................................... 7.125 Public Service Employees Credit Union Co-Operative Ltd v Campion (1984) 75 FLR 131 ................................................................................................. 3.313 Public Service Employees Credit Union Co-op Ltd v Campion (1984) 75 FLR 131 ............. 3.170 Public Trustee v Taylor [1978] VR 289 ................................................................ 3.110 Pukallus v Cameron (1982) 180 CLR 447 .............................................................. 3.97 Pyramid Building Society (in liq) v Scorpion Hotels Pty Ltd (1996) 14 ACLC 679 ... 12.140, 12.170 Pyrenees Shire Council v Day (1998) 192 CLR 330 ................................................. 6.630

Q QRxPharma Limited (Administrators Appointed), Re [2015] FCA 1140....................... 14.840 Qintex Australia Finance Ltd v Schroders Australia Ltd (1991) 9 ACLC 109 ................... 9.970 Qintex Ltd (No 2), Re (1990) 8 ACLC 811 ............................................................ 12.210 Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 ........................................... 12.150 Queensland Co-operative Milling Association Ltd, Re; Re Defiance Holdings Ltd (Barnes Milling Application) (1976) 25 FLR 169............................................. 5.90 Queensland Mines Ltd v Hudson (1978) 18 ALR 1 ............................................... 13.1300 xxvi

Table of Cases

Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (1989) 167 CLR 177 .................................................................................... 5.90, 5.290 Quikfund (Australia) Pty Ltd v Prosperity Group International Pty Limited (in Liq) [2013] FCAFC 5 ................................................................................. 5.860

R R v Alqudsi [2015] NSWSC 1222 ........................................................................ 1.180 R v Burgess [1936] 55 CLR 608 ........................................................................ 1.560 R v Byrnes (1995) 183 CLR 501....................................................................... 13.1250 R v Clarke (1927) 40 CLR 227............................................................................ 2.115 R v Donald [1993] 2 Qd R 680 ....................................................................... 13.1240 R v Ghosh [1982] 2 All ER 689 ....................................................................... 13.1283 R v Nuttall [2011] 1 Qd R 270 ........................................................................... 7.205 RA & A Bailey & Co Ltd v Boccaccio Pty Ltd (1986) 4 NSWLR 701 .............................. 8.530 RCA Corp v John Fairfax & Sons (1981) 34 ALR 345 ............................................... 8.450 RGC Ltd, Re (1998) 29 ACSR 445...................................................................... 16.80 RLA Polymers Pty Ltd v Nexus Adhesives Pty Ltd (2011) 280 ALR 125........................ 8.2740 RPL Central Pty Ltd v Commissioner of Patents [2013] AIPC 92-458; [2013] FCA 871 .................................................................................................... 8.1850 RTA v McGuiness [2003] Aust Torts Reports 81-688.............................................. 6.830 RTP Holdings Pty Ltd v Roberts (2000) 36 ACSR 170 ............................................ 14.430 Raben Footwear Pty Ltd v Polygram Records Inc (1997) 75 FCR 88 .................. 8.580, 8.990 Rafferty v Madgwicks (2012) 203 FCR 1 ............................................................ 8.2790 Raffles v Wichelhaus (1864) 2 H & C 906; 159 ER 375............................................... 3.55 Ragless v IPA Holdings Pty Ltd [2012] SASC 203.................................................. 14.430 Rakic v Johns Lyng Insurance Building Solutions (Victoria) Pty Ltd (Trustee) [2016] FCA 430....................................................................................... 5.585 Ramsgate Victoria Hotel Co Ltd v Montefiore (1866) LR 1 Exch 109 .................... 2.105, 2.155 Ranoa Pty Ltd v BP Oil Distribution Ltd (1989) 91 ALR 251 ..................................... 8.2770 Rasmussen & Russo Pty Ltd v Gaviglio [1982] Qd R 571 ........................................... 7.172 Rawlinson & Brown Pty Ltd v Witham [1995] Aust Tort Reports 62,403 (81-341)................................................................................................ 6.350 Re Maiden Civil (P&E) Pty Ltd v Queensland Excavation Services Pty Ltd [2013] NSWSC 852......................................................................... 17.200, 17.205 Red Bull Australia Pty Ltd v Sydneywide Distributors Pty Ltd (2001) 53 IPR 481 ........... 8.2570 Reference by Australasian Performing Right Assoc Ltd; Re Australian Broadcasting Corp (1985) 5 IPR 449............................................................. 8.800 Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378...... 13.1160, 13.1170, 13.1175, 13.1200, 13.1260, 13.1300, 13.1390 Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134..................................................... 7.163 Renato Evangelisti Nominees Pty Ltd v EEC (1990) Pty Ltd (in liq) (1995) 13 ACLC 1378 ............................................................................................. 9.910 Repatriation Commission v Harrison (1997) 78 FCR 442......................................... 9.940 Residues Treatment & Trading Co Ltd v Southern Resources Ltd (No 4) (1988) 51 SASR 177 ...................................................................... 13.1400, 14.220, 14.260 Review Australia Pty Ltd v Innovative Lifestyle Investments Pty Ltd (2008) 166 FCR 358 ......................................................................................... 8.1670 Reynolds v Turner [1967] 1 WLR 1193................................................................ 4.600 Reynolds Bros (Motors) Pty Ltd v Esanda Ltd (1983) 1 ACLC 1333 ............................. 17.140 Rich v ASIC (2004) 220 CLR 129......................................... 13.280, 13.470, 13.1270, 13.1275 Richardson v Oracle Corporation Australia Pty Ltd [2014] FCAFC 82 .......................... 6.620 Riches v Hogben [1986] 1 Qd R 315 ................................................................... 2.255 Richmond Valley Council v Standing (2002) 127 LGERA 237; [2002] Aust Torts Reports 81-679 ...................................................................................... 6.830 Riviera Group Pty Ltd (admins apptd) (recs & mgrs apptd), Re (2009) 72 ACSR 352...................................................................................................... 19.50 xxvii

Business and Corporate Law

Roadshow Films Pty Ltd v iiNet Ltd (2012) 248 CLR 42.................................. 8.750, 8.1260 Robert J Zupanovich Pty Ltd v B & N Beale Nominees Pty Ltd (1995) 59 FCR 49........... 8.1160 Roberts v Walter Developments Pty Ltd (1997) 15 ACLC 882 .................................. 14.560 Robinson v Ashton (1875) LR 20 Eq 25............................................................... 9.170 Robinson v Graves [1935] 1 KB 579.................................................................... 4.110 Roden v International Gas Applications (1995) 125 FLR 396................................... 13.1350 Romeo v Conservation Commission (NT) (1998) 192 CLR 431 .......................... 6.610, 6.630 Roscorla v Thomas (1842) 3 QB 234; 114 ER 496 ................................................... 2.352 Rose & Frank Co v JR Crompton & Bros Ltd [1925] AC 445 .............................. 2.282, 3.320 Roumanus v Orchard Holdings (NSW) Pty Ltd (In Liq) [2012] FCA 775....................... 14.840 Rowland v Meudon Pty Ltd [2008] NSWSC 381 .................................................. 14.355 Royal British Bank v Turquand (1856) 119 ER 886 ................................................ 12.240 Ruut v Head (1996) 20 ACSR 160 .................................................................... 14.820 Ryan v Mutual Tontine Westminster Chambers Assoc [1893] 1 Ch 116......................... 3.685

S S & Y Investments (No 2) Pty Ltd v Commercial Union Assurance Co of Australia Ltd (1986) 44 NTR 14 ................................................................... 12.320 SAJ v The Queen [2012] VSCA 243 .................................................................. 13.1283 SBEG v Commonwealth of Australia (2012) 208 FCR 235; [2012] FCAFC 189 .................. 6.610 SH Lock (Aust) Ltd v Kennedy (1988) 12 NSWLR 482.............................................. 3.251 SRKKK and ASIC, Re (2002) 42 ACSR 551 ........................................................... 9.680 SW Hart & Co Pty Ltd v Edwards Hot Water Systems (1985) 159 CLR 466.................... 8.320 St George Ltd v Commissioner of Taxation [2008] FCA 453 ............................ 17.30, 17.230 St John Shipping Corporation v Joseph Rank Ltd [1975] 1 QB 267 ..................... 3.297, 3.300 Salomon v Salomon & Co Ltd [1897] AC 22 ............................... 9.870, 9.880, 15.70, 15.190 Salt Asia Holdings Pty Ltd, Re (2004) 49 ACSR 38 ................................................ 15.130 Samsung: Samsung Electronics Co Ltd v Apple Inc (2011) 217 FCR 238 ....................... 8.2125 San Sebastian Pty Ltd v Minister Administering the Environmental Planning and Assessment Act (NSW) (1986) 162 CLR 340 ....................................... 3.141, 6.300 San Sebastian Pty Ltd v Minister Administering the Environmental Planning and Assessment Act 1979 (NSW) (1986) 162 CLR 340 ........................................ 6.530 Sandra Investments Pty Ltd v Booth (1983) 153 CLR 153 .......................................... 3.511 Sands & McDougall Wholesale Pty Ltd (in liq) v Federal Commissioner of Taxation [1999] 1 VR 489 ......................................................................... 19.250 Sanford v Sanford Courier Service Pty Ltd (1986) 5 ACLC 394................................. 14.540 Saunders v Anglia Building Society [1971] AC 1004.................................................. 3.91 Scandanavian Tobacco Group Eersel BV v Trojan Trading Company Pty Ltd [2016] FCAFC 91 .................................................................................... 8.2423 Scarborough v Sturzaker (1905) 1 Tas LR 117 ....................................................... 2.452 Schellenberg v Tunnel Holdings (1999) 200 CLR 121 .............................................. 6.340 Scolio Pty Ltd v Cote (1992) 6 WAR 475 ............................................................. 3.314 Scott v Coulson [1903] 1 Ch 249......................................................................... 3.41 Scottish Co-operative Wholesale Society Ltd v Meyer [1959] 3 AC 324............. 13.960, 14.520 Seafolly Pty Ltd v Fewstone Pty Ltd (2014) 313 ALR 41.......................................... 8.1760 Secton Pty Ltd (t/a BWN Industries) v Delawood Pty Ltd (1991) 21 IPR 136 ................. 8.2720 Seidler v Schallhofer [1982] 2 NSWLR 80 ............................................................ 3.311 Shacklady v Atkins (1994) 30 IPR 387............................................................... 8.1750 Shaddock & Associates Pty Ltd v Parramatta City Council (1981) 150 CLR 225 ............... 6.510 Shafron v Australian Securities and Investments Commission [2012] HCA 18 ..... 13.590, 13.595 Shamsallah Holdings Pty Ltd v CBD Refrigeration & Airconditioning Services Pty Ltd (2001) 19 ACLC 517........................................................................ 14.560 Sheahan v Verco (2001) 79 SASR .................................................................... 13.590 Sheahan v Verco (2001) 79 SASR 109 ............................................................... 13.670 Shears v Phosphate Co-operative Co Australia Ltd (1989) 7 ACLC 812 ....................... 14.550 Shell Co of Australia Ltd v Esso Standard Oil (Aust) Ltd (1963) 109 CLR 407 ............... 8.2400 xxviii

Table of Cases

Shelley v Paddock [1980] QB 348..................................................................... 3.375 Shiels v Drysdale (1880) 6 VLR (E) 126 ............................................................... 2.361 Shogun Finance Ltd v Hudson [2002] QB 834 ....................................................... 3.90 Shortall v White [2007] NSWCA 372.................................................................. 2.245 Shum Yip Properties Development Ltd v Chatswood Investment & Development Co Pty Ltd (2002) 166 FLR 451 ........................................ 14.410, 14.590 Shuttleworth v Cox Brothers & Co (Maidenhead) Ltd [1927] 2 KB 9.......................... 13.260 Silver Lake Resources Ltd, Re [2012] FCA 32 ...................................................... 18.100 Simos v National Bank of Australasia Ltd (1976) 10 ACTR 4...................................... 3.732 Simpkins v Pays [1955] 1 WLR 975..................................................................... 2.261 Sixty-Fourth Throne Pty Ltd v Macquarie Bank (1996) 130 FLR 411 ................... 12.140, 12.170 Smart Company Pty Ltd (In Liq) v Clipsal Australia Pty Ltd [2011] FCA 35.................... 14.445 Smartec Capital Pty Ltd v Centro Properties Ltd [2011] NSWSC 495 .......................... 14.355 Smith v Hughes (1871) LR 6 QB 597 .................................................................... 3.81 Smith v William Charlick Ltd (1924) 34 CLR 38 ...................................................... 3.175 Smith v Yarnold [1969] 2 NSWR 410......................................................... 9.280, 9.290 Smith & Fawcett Ltd, Re [1942] Ch 304................................................... 13.880, 14.180 Smith Stone & Knight Ltd v Birmingham Corp [1939] 4 All ER 116 ..................... 9.910, 9.950 Solomon Pacific Resources NL v Acacia Resources Ltd (1996) 19 ACSR 238................. 18.120 Sons of Gwalia Ltd v Margaretic (2007) 231 CLR 160 ......................... 14.830, 14.835, 14.840 Sony Entertainment (Australia) Ltd v Smith (2005) 64 IPR 18 ................................. 8.1220 Souter v Shyamba Pty Ltd (2002) 11 BPR 20269 ................................................... 2.284 South Australia v Clark (1996) 66 SASR 199 ....................................................... 13.540 South Australia v Clark (1996) 66 SASR 199; 14 ACLC 1,019 ........................... 13.670, 13.1160 Southern Real Estate Pty Ltd v Dellow (2003) 87 SASR 1 ...................................... 13.1220 Spanswick v Laguzza (2002) 35 MVR 501 ........................................................... 6.830 Spar Licensing Pty Ltd v Mis Qld Pty Ltd (2014) 314 ALR 35.................................... 8.2790 Spargos Mining NL, Re (1990) 3 WAR 166......................................................... 14.490 Spencer Industries Pty Ltd v Collins (2003) 58 IPR 425.......................................... 8.2150 Spies v The Queen (2000) 201 CLR 603 ............................................................ 13.940 Spirit Pharmaceuticals Pty Ltd v Mundipharma Pty Ltd (2013) 216 FCR 344 ................ 8.2040 Spong v Spong (1914) 18 CLR 544..................................................................... 3.202 Spreag v Paeson Pty Ltd (1990) 94 ALR 679 ....................................................... 9.940 Squatting & Investment Co Ltd v Permewan Wright & Co Ltd (1885) 6 ALT 607 ............ 3.545 Stapp v Surge Holdings Pty Ltd (1999) 17 ACLC 896............................................. 14.790 Steele-Smith v Liberty Financial Pty Ltd [2005] NSWSC 398 ..................................... 2.510 Steinberg v Scala (Leeds) Ltd [1923] 2 Ch 452 ...................................................... 2.461 Sterling Engineering Co Ltd v Patchett [1955] AC 534........................................... 8.2150 Stevenson Jaques & Co v McLean (1879-80) LR 5 QBD 346...................................... 2.175 Stewart v Normandy NFM Ltd (2000) 18 ACLC 814 .............................................. 13.300 Stilk v Myrick (1809) 2 Camp 317; 170 ER 1168 .............................................. 2.401, 2.405 Story v Advance Bank Australia Ltd (1993) 31 NSWLR 722 ............................. 12.100, 12.140 Strong v Woolworths Ltd (2012) 86 ALJR 267; [2012] HCA 5 .................................... 6.820 Sullivan v Moody (2001) 207 CLR 562................................................................ 6.350 Sumpter v Hedges [1898] 1 QB 673 .................................................................. 3.745 Sunburst Properties Pty Ltd (in liq) v Agwater Pty Ltd [2005] SASC 335............. 12.110, 12.150 Superbee Pty Ltd, Re (1989) 7 ACLC 418........................................................... 14.800 Supercar International Holdings Ltd v Sommers; Tinkler Group Holdings Pty Ltd v Sommers [2011] NSWSC 336 ................................................................ 10.35 Supply, Minister of v Servicemen’s Cooperative Ltd (1951) 82 CLR 621........................ 4.250 Sutherland Shire Council v Heyman (1987) 157 CLR 424................................. 6.300, 6.490 Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313 .................................. 14.430 Sycotex Pty Ltd v Baseler (1994) 51 FCR 425 ........................................... 13.940, 13.1400 Sydney City Council v West (1965) 114 CLR 481..................................................... 2.702 Sydney Organising Committee for the Olympic Games v Clarke (1998) 41 IPR 403..................................................................................................... 8.1110 Symes v Laurie [1985] 2 Qd R 547...................................................................... 4.90 xxix

Business and Corporate Law

T T & X Company Pty Limited v Chivas [2014] NSWCA 235......................................... 6.890 T & X Company Pty Ltd v Chivas [2014] NSWCA 235 .............................................. 6.720 TCN Channel Nine Pty Ltd v Network Ten Pty Ltd (No 2) (2005) 145 FCR 35 ................. 8.930 Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272 ..................... 3.611 Tabet v Gett (2010) 240 CLR 537...................................................................... 6.450 Taco Company of Australia v Taco Bell Pty Ltd (1982) 42 ALR 177; [1982] FCA 136 ..................................................................................................... 5.583 Talbot v General Television Corp Pty Ltd [1980] VR 224 .............................. 8.2700, 8.2740 Tallglen Pty Ltd v Optus Communications Pty Ltd (1998) 146 FLR 380............. 16.470, 16.480 Tate v Williamson (1866) LR 2 Ch App 55 .................................................... 3.215, 3.225 Taxation (Cth), Commissioner of v Whitford’s Beach Pty Ltd (1982) 150 CLR 355..................................................................................................... 9.940 Taylor v Johnson (1983) 151 CLR 422................................................................... 3.85 Taylor v The Owners–Strata Plan 11564 [2014] HCA 9 ............................................ 6.900 Taylor (Trustee) Re Kwok v Goldana Investments Pty Ltd (Receivers and Managers appointed) (No 2) [2015] FCA 947 ................................................... 14.72 Teen Ranch Pty Ltd v Brown (1995) 87 IR 308 ...................................................... 2.271 Telstra Corporation Ltd v Phone Directories Co Pty Ltd (2010) 194 FCR 142 .................. 8.140 Tepko PtyLtd v Water Board [2001] HCA 19 ........................................................ 6.530 Tesco Supermarkets Ltd v Nattrass [1972] AC 153....................................... 12.320, 12.330 The Swan Brewery Co Ltd (No 2), Re (1976) 3 ACLR 168 ........................................ 15.130 Thomas v HW Thomas Ltd (1984) 2 ACLC 610 .................................................... 14.640 Thomas Marshall (Exports) Ltd v Guinle [1978] 3 WLR 116..................................... 13.1210 Thomson v London, Midland and Scottish Railway Co [1930] 1 KB 41 ......................... 2.683 Thomson v STV Pan Ocean Co Ltd [2012] FCAFC 15 ............................................... 5.585 Thorby v Goldberg (1964) 112 CLR 597 ............................................................. 13.1110 Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163 ................................................. 2.55 Tiger Investment Co Ltd, Re (1999) 158 FLR 321 .................................................. 16.170 Tinn v Hoffman (1873) 29 LT 271........................................................................ 2.90 Titlow v Intercapital Group (Australia) Pty Ltd (1996) 65 FCR 449 ............................ 14.100 Tivoli Freeholds Ltd, Re [1972] VR 445 ............................................................. 14.820 Toby Construction Products Pty Ltd v Computer Bar (Sales) Pty Ltd [1983] 2 NSWLR 48............................................................................................. 4.130 Toby Constructions Products Pty Ltd v Computer Bar Sales Pty Ltd [1983] 2 NSWLR 48 ............................................................................................ 4.100 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 ............................ 2.675, 7.25 Tolmark Homes Pty Ltd v Paul (1999) 46 IPR 321 ................................................. 8.1130 Tomanovic v Global Mortgage Equity Corp Pty Ltd [2011] NSWCA 104 .... 14.675, 14.770, 14.820 Totex-Adon Pty Ltd v Marco (1982) 1 ACLC 228 .................................................. 13.1190 Totex-Adon Pty Ltd, Re [1980] 1 NSWLR 605 ............................................. 11.160, 11.270 Tourprint International Ltd v Bott (1999) 17 ACLC 1,543 ........................................ 13.840 Trade Practices Commission v David Jones (Australia) Ltd (1986) 13 FCR 446 ............... 5.160 Trade Practices Commission v Dunlop Australia Ltd (1980) 43 FLR 434....................... 5.420 Trade Practices Commission v Email Ltd (1980) 43 FLR 383 ..................................... 5.150 Trade Practices Commission v Legion Cabs (Trading) Co-operative Society Ltd (1978) 35 FLR 372 .................................................................................... 5.370 Trade Practices Commission v Penfolds Wines Pty Ltd [1991] ATPR 52,078.................. 5.400 Trade Practices Commission v Sony Australia Pty Ltd (2000) ATPR 41-031 ................... 5.420 Traderight (NSW) Pty Ltd v Bank of Queensland Ltd [2015] NSWCA 94 .................... 8.2800 Trafalgar West Investments Pty Ltd v Superior Lawns Australia Pty Ltd [2012] WASC 460 ........................................................................................... 14.360 Transport Tyre Sales Pty Ltd v Montana Tyres Rims and Tubes Pty Ltd (1999) 93 FCR 421........................................................................................... 8.2420 Transvaal Lands Co v New Belgium (Transvaal) Land & Development Co [1914] 2 Ch 488 ............................................................................................. 13.1160 xxx

Table of Cases

Trevey v Grubb (1982) 44 ALR 20 ..................................................................... 2.262 Trevor v Whitworth (1887) 12 App Cas 409 ........................................ 16.20, 16.30, 16.240 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107....... 2.720, 2.731, 2.735 Triplex Safety Glass Co Ltd v Scorah (1938) 55 RPC 21........................................... 8.2150 Tufton v Sperni [1952] 2 TLR 516 ....................................................................... 3.211 Tummon Investments Pty Ltd (in liq), Re (1993) 11 ACLC 1139 .................................. 12.210 Turnbull v NRMA (2004) 186 FLR 360 ..................................................... 11.140, 14.600 Twentieth Century Fox Film Corp v South Australian Brewing Co Ltd (1996) 66 FCR 451; 34 IPR 247................................................................................ 8.2630 Two Lands Services Pty Ltd v Cave [2000] NSWSC 14 ............................................ 3.330

U UAERJ Pty Ltd v Jupiters Ltd [2014] NSWCA 213 .................................................... 7.75 UTSA Pty Ltd v Ultra Tune Australia Pty Ltd (No 2) (1996) 14 ACLC 1,262.................... 19.280 UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd (No 2) (1996) 14 ACLC 1,610 ........... 19.280 Ubertini v Saeco International Group SpA (No 4) [2014] VSC 47 .............................. 14.680 United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1............................. 9.90, 9.330 United Rural Enterprises Pty Ltd v Lopmand Pty Ltd (2003) 47 ACSR 514................... 14.350 Unity APA Ltd v Humes Ltd (No 2) [1987] VR 474 ................................................ 14.350 Universal Music Australia Pty Ltd v ACCC (2003) 57 IPR 353; [2003] ATPR 41-947.................................................................................................. 5.320 Universal Telecasters (Qld) Ltd v Guthrie (1978) 18 ALR 531 ................................... 18.260 Universe Tankships Inc of Monrovia v International Transport Workers’ Federation [1983] 1 AC 366......................................................................... 3.173 University of London Press Ltd v University Tutorial Press [1916] 2 Ch 601............. 8.80, 8.90 University of New South Wales v Moorhouse (1975) 133 CLR 1 ........................ 8.430, 8.440 University of Sydney v Objectivision Pty Ltd [2015] FCA 1528................................... 9.950 University of Western Australia v Gray (2009) 179 FCR 346........................... 8.2150, 8.2160 Upfill v Wright [1911] 1 KB 506 ......................................................................... 3.312

V Vairy v Wyong Shire Council (2005) 80 ALJR 1; [2005] HCA 62 ................................. 6.630 Van Den Esschert v Chappell [1960] WAR 114 ...................................................... 2.575 Van Erp v Hill (t/a R F Hill & Associates) [1995] Aust Torts Reports 62,051 (81-317) ................................................................................................ 6.550 Van der Lely NV v Bamfords Ltd [1963] RPC 61................................................... 8.1890 Vandepitte v Preferred Accident Insurance Corporation of New York [1933] AC 70................................................................................................... 2.750 Vanfox Pty Ltd, Re [1995] 2 Qd R 445 ............................................................... 11.320 Vawdrey Australia Pty Ltd v Kreuger Transport Equipment Pty Ltd (2009) 261 ALR 269 ............................................................................................... 8.350 Vermillion Resources Pty Ltd v Gibbins Investments Pty Ltd [2011] FCAFC 149............. 10.200 Vero Insurance Ltd v Kassem [2010] NSWSC 838......................................... 12.110, 12.120 Victor Battery Co Ltd v Curry’s Ltd [1946] Ch 242 ................................................ 16.470 Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528................... 3.623 Victoria University of Technology v Wilson (2004) 60 IPR 392................................. 8.2150 Vines v Australian Securities & Investments Commission (2007) 62 ACSR 1 ....... 13.580, 13.584 Vivo International Corpn Pty Ltd v TiVo Inc (2012) 294 ALR 661............................... 8.2365 Vrisakis v ASC (1993) 9 WAR 395 ........................................................... 13.540, 13.740 Vrisakis v ASC (1993) 9 WAR 395; 11 ACSR 162 .................................................... 13.660

xxxi

Business and Corporate Law

W WEA International Inc v Hanimex Corp Ltd (1987) 17 FCR 274 .................................. 8.450 Wakeling v Ripley (1951) 51 SR (NSW) 183 ........................................................... 2.251 Walker v Hungerfords (1987) 49 SASR 93 ................................................. 9.940, 9.950 Walker v New South Wales (1994) 182 CLR 45 ..................................................... 1.260 Walker v Sydney West Area Health Service [2007] Aust Torts Reports 81-892; [2007] NSWSC 526 .................................................................................. 6.870 Walker v Wimborne (1976) 137 CLR 1 ..................................... 9.970, 12.30, 13.940, 13.950 Wallis v Downard-Pickford (North Queensland) Pty Ltd (1994) 179 CLR 388 ................. 1.170 Walmsley v Cossentino [2001] NSWCA 403 ........................................................ 6.550 Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387............................ 2.412, 2.415 Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd [2014] NSWCA 326 ......................... 10.35 Wambo Mining Corp Pty Ltd v Wall Street (Holding) Pty Ltd (1998) 16 ACLC 1601 ......................................................................................... 16.470, 16.480 Wan Ze Property Development (Aust) Pty Ltd, Re [2012] NSWSC 722 ....................... 14.455 Ward v Premier Ice Skating Rink Pty Ltd [1986] ATPR 40-681.................................... 3.161 Wardar’s (Import & Export) Co Ltd v Norwood [1968] 2 All ER 602 ........................... 4.220 Warman International v Envirotech Australia Pty Ltd (1986) 11 FCR 478 .................... 8.2700 Warner Bros Pictures Inc v Nelson [1937] 1 KB 209 ............................................... 3.695 Warumungu Land Claim, Re; Ex parte Attorney-General (NT) (1987) 18 FCR 163; 77 ALR 27......................................................................................... 1.520 Waters v Winmardun Pty Ltd (1990) 9 ACLC 238 ................................................. 14.185 Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459........................... 14.620 Weinstock v Beck [2013] HCA 14 ..................................................................... 14.735 West v AGC (Advances) Ltd (1986) 5 NSWLR 610.................................................. 3.255 Westchester Financial Services Pty Ltd v Acclaim Exploration NL (1999) 32 ACSR 499 ............................................................................................. 16.80 Western Australia v Brown [2014] HCA 8............................................................ 1.260 Western Australia v Ward; Attorney – General (NT) v Ward; Ningarmara v Northern Territory (2002) 213 CLR 1; [2002] HCA 28........................................... 1.260 Westgold Resources NL v Precious Metals Australia Ltd (2002) 171 FLR 20................... 14.76 Westmelton (Vic) Pty Ltd v Archer [1982] VR 305 ................................................. 3.203 Westpac Banking Corp v Bell Group Ltd (in liq) (No 3) [2012] WASCA 157 .................. 13.1078 White v Bluett (1853) 23 LJ Ex 36 ..................................................................... 2.365 White Star Line, Re [1938] 1 All ER 607 ............................................................. 15.190 Whitehouse v Capital Radio Network Pty Ltd (2004)13 Tas R 27 ............................... 11.320 Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 ....................................... 13.1050 Whittingon v Smeaton [2016] ACTSC 76............................................................ 6.860 Whittington v Seale-Hayne (1900) 82 LT 49......................................................... 3.135 Wicks v State Rail Authority of NSW (2010) 241 CLR 60; [2010] HCA 22 ....................... 6.910 Wik People v Queensland (1996) 187 CLR 1 ......................................................... 1.250 Wilcox v Kogarah Golf Club (1995) 14 ACLC 421 ................................................... 10.150 Wilkinson v Downton [1897] 2 QB 57................................................................. 6.110 Williams v Hursey (1959) 103 CLR 30................................................................. 9.270 Wilson v Manna Hill Mining Company Pty Ltd [2004] FCA 912 ................................... 11.20 Wimborne v Brien (1997) 15 ACLC 793............................................................... 9.970 Windsurfing International Inc v Petit (1983) 3 IPR 449 ................................ 8.1890, 8.1910 Wingecarribee Shire Council v Lehman Brothers Australia (in liq) (2012) 7 BFRA 1; [2012] FCA 1028 ............................................................................ 5.585 Winner v Ammar Holdings Pty Ltd (1993) 41 FCR 205 ........................................... 8.1900 Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2000) 18 ACLC 665........................ 14.280 Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2001) 166 FLR 144 ...... 14.280, 16.170, 16.180, 16.190 Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666 ....................... 13.1390, 14.260 Wise v Perpetual Trustee Co Ltd [1903] AC 139.................................................... 9.280 Wondoflex Textiles Pty Ltd, Re [1951] VLR 458................................................... 14.790 xxxii

Table of Cases

Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 315; [2004] HCA 16 ....................................................................................... 6.560 Woolworths v Strong [2010] NSWCA 282........................................................... 6.820 Woolworths Ltd v GetUp Ltd [2012] FCA 726 ...................................................... 11.120 Woolworths Ltd v Kelly (1991) 22 NSWLR 189 ................................................... 13.1340 Workplace Safety Australia Pty Ltd v Simple OHS Solutions Pty Ltd (2015) 89 NSWLR 594 ......................................................................................... 8.2790 World of Technologies (Aust) Pty Ltd v Tempo (Aust) Pty Ltd (2007) 71 IPR 307 .......... 8.1600 Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 .................................................. 8.2750 Wright Prospecting Pty Ltd v Hancock Prospecting Pty Ltd (No 9) [2010] WASC 44 .............................................................................................. 9.160 Wyong Shire Council v Shirt (1980) 146 CLR 40 ................................................... 6.400

Y Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410.......... 3.293, 3.294 Yates v Jones [1990] Aust Torts Reports 67,632 (81-009)............................... 6.450, 6.820 Yazbek v Aldora Holdings Pty Ltd (2003) 45 ACSR 53............................................ 11.320 Yenidje Tobacco Co Ltd, Re [1916] 2 Ch 426....................................................... 14.800 Yerkey v Jones (1939) 63 CLR 649 ............................................................ 3.193, 3.195 Yonge v Toynbee [1910] 1 KB 215 ...................................................................... 7.183 Yorke v Lucas (1985) 158 CLR 661 ................................................................... 18.240 Young v Odeon Music House Pty Ltd (1976) 10 ALR 153 ........................................ 8.1060 Yu Mei Chu v State Rail Authority [2007] NSWDC 41..................................... 6.450, 6.820

Z Zeccola v Universal City Studios Inc (1982) 46 ALR 189 .......................................... 8.230 Zhu v Treasurer (NSW) (2004) 218 CLR 530......................................................... 2.785 Zorom Enterprises Pty Ltd v Zabow (2007) 71 NSWLR 354 ...................................... 7.186

xxxiii

TOPIC 1 Introduction to the Australian Legal System What is law?.................................................................................... Where did our laws come from?.......................................................... English legal history .......................................................................... Reception of English Law into Australia in 1788 ...................................... Steps towards a new legal system in New South Wales............................. Development of legal systems in other States......................................... Sources of law ................................................................................. Form of a statute.............................................................................. The making of a statute ..................................................................... Judge-made law............................................................................... Relationship between judge-made law and statutory law.......................... Statutory interpretation ..................................................................... Separation of powers ........................................................................ Changing the Constitution................................................................. Classification of law: public and private................................................. Classification of law: civil and criminal ..................................................

[1.10] [1.30] [1.40] [1.80] [1.90] [1.270] [1.350] [1.390] [1.405] [1.440] [1.450] [1.460] [1.550] [1.570] [1.580] [1.730]

Extract from Miles C and Dowler W, A Guide to Business Law (21st ed, Lawbook Co., 2015), Chapter 1 (including updates for 2016).

Terminology • Acts: laws passed by State/Federal Parliaments (also known as “statutes”); • Bicameral: comprising two houses (in parliament); • Bill: proposed law introduced into parliament; • Common law: laws made by the judges in the courts; • Commonwealth Constitution: created our Commonwealth legal/political system; • Concurrent powers: powers that can be exercised by others at the same time; • Delegated legislation: rules/regulations made by a body that parliament has delegated the power to do so; • Equity: legal rules based on fairness and justice; • Exclusive powers: powers that can only be exercised by one body; • Extrinsic: outside; • Judicial: relating to the courts/judges; • Judicial power: power exercised by the courts/judges; • Legislation: collection of all laws made by parliament (State or Federal); • Legislative power: law-making power of parliaments; 1

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• Native title: indigenous ownership of land recognised by continuous connection with the land; • Parliament: State and Federal law-making bodies; • Private law: law dealing with the rights of individuals; • Public law: law that protects society/public; • Referendum: voting to change the Commonwealth Constitution; • Residual powers: powers that remained with the States (those not exercised by the Commonwealth) • Statutes: laws made by State/Federal Parliaments (also known as “acts”); • Terra nullius: deserted/uncultivated land/land belonging to no-one.

WHAT IS LAW? [1.10] Law is difficult to define and many legal writers and philosophers over the years have tried to do so. These attempts at defining law have led to many different conclusions, suggesting that any view on what the law is may largely depend upon a person’s moral, political, religious or ethical experience and beliefs as well as the overall influence of their society. A useful explanation of the law would be to say that it is a set of rules aimed at regulating the behaviour of people in society. In Australia such rules are made either by the Commonwealth or States and are enforced through the use of legal action. If we expand the definition to business or commercial law, it may be said to be concerned with legal rules and procedures regarding people engaged in business or commercial transactions. Commercial law regulates the conduct of those engaged in business (including individuals, sole traders, partnerships, trusts and companies) and it comprises both civil law and, to a lesser extent, criminal law. The purpose of law is to regulate conduct for the benefit of society as a whole and in the event that conflict arises, the law provides the means to hear and settle disputes on an independent and impartial basis. Laws are made by humans for humans. Laws are usually created either: • in the courts (common law and equity); or • in the Parliaments (statute law).

Why study commercial or business law? [1.20] Commercial law is primarily concerned with the rules and customs commonly associated with ordinary business activities including contract law, business entities, consumer protection laws and torts. A study of commercial or business law will enable you to identify legal rights and obligations in business transactions and the likely impact of legal rules, principles and procedures in a business environment. Whilst a large portion of commercial law is derived from judges, there has been an increase in the amount of statute law enacted 2 [1.10]

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regulating various aspects of commercial law including the Sale of Goods Act 1923 (NSW) and similar legislation in other States and the new Competition and Consumer Act 2010 (Cth).

WHERE DID OUR LAWS COME FROM? [1.30] The answer lies in our history. The foundations of the legal system in Australia originated in England and came to Australia in 1788 with the arrival of the First Fleet. Following settlement the colony of New South Wales received various English laws and a legal system based on the English model. To gain a proper understanding of why we have our current laws and legal institutions we must examine how English law developed in England and how it was introduced and developed throughout Australia.

ENGLISH LEGAL HISTORY Common law [1.40] The English legal system developed out of customs both before and after the Norman Conquest in 1066. Much of the actual law in those early days was never written down because the customs were traditionally handed down verbally from generation to generation. After the Norman invasion of England in 1066 came the establishment of a feudal system of law. The country was divided into various parts and each was ruled by a lord who had the support and loyalty of the people living in that area. Each lord had his own court to deal with local matters. However, important legal disputes were heard by the king in his own court, called the King’s Court (or Curia Regis), with the assistance of selected barons and members of the church. The king and his selected officials acted as law makers and judges in matters where the king believed his participation was necessary. To assist people in bringing complaints, some of the early English kings developed the practice of sending judges into the countryside across England to hear and settle disputes instead of requiring the people to attend the King’s Court whenever and wherever it was sitting. Under the customary legal system at that time, each district had customs and laws that were peculiar to that geographical area. In addition to applying justice on behalf of the king, the judges relied on the customs existing in the district where the dispute was heard to assist them in resolving the dispute. As a result decisions were different depending on the customs that existed in a particular area. Over time, these judges became professional travelling judges and they began writing and recording their own decisions. As a result, they began to collect a body of legal principles and rules that they would apply to individual disputes. They started applying the same legal principles across the country even when they came into conflict with the local customs. In the interests of consistency, the judges attempted to make similar decisions in cases that were [1.40] 3

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similar in their facts and circumstances. This was the start of the doctrine of precedent. This doctrine will be discussed in greater detail in Chapter 2 (Miles) at [2.240]–[2.280]. The effect of using this new system of handling disputes and problems in a similar way and applying consistent legal principles was that it created a body of law that was common to the whole country. As the legal principles were commonly applied everywhere, they were referred to as the common law. The common law was the product of the courts and has been traditionally identified as “judge-made”.

The rise of equity [1.50] As the doctrine of precedent developed, it became very inflexible. Precedent would be applied even where the original decision was clearly wrong or unjust, or where there had been changes in society that made the decision obsolete. The common law courts adopted rigid rules of procedure that barred some people from obtaining justice. Common law judges were unwilling to devise new remedies for new situations and this caused many people to have little or no remedy at common law. Persons affected by these injustices would petition the king, complaining that they were denied justice. In appropriate cases the king would refer the matters to one of his officials called the chancellor, who would deal with these petitions on the basis of good conscience and fairness. The chancellor could override the ruling of the common law courts. A separate and distinct system of law now operated alongside the common law courts. This system of law was called equity. The word equity is, in origin, just another word for fairness. In time, the chancellor began to function as a judge and set up his own court, the Chancery, which was the beginning of the Equity Courts. Chancery or Equity Courts (as they later became known) looked behind the strict common law rules and attempted to apply the principles of natural law and ensure that the common law was just. Equity used different procedures than the common law courts and also recognised legal rights that the common law did not. As an example, equity recognised and developed the law of trusts, which applied where one person legally held property for the benefit of another, eg a father holding land in trust for his children. The traditional remedy that common law provided to a wronged party was damages (payment of money) as compensation for the wrong done to that person. Equity tried to remedy the situation by ordering the person at fault to remedy the wrong as far as possible. Equitable remedies were applied where the common law failed to provide any remedy at all or supplied a remedy that was inadequate. Equity also offered different remedies from those available at common law.

4 [1.50]

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Figure 1.1: Equitable remedies

Over time, equity developed as a separate system of law with its own rules, remedies and procedures. Although in competition with the common law system, equity refined the system and made it more flexible. However, the principles of equity eventually became as rigid and fixed as the common law because the judges saw the need to deal with similar cases in similar ways; the need for fairness made it difficult for judges to consider the individual case on its merits. [1.60] A separate and distinct system of law now operated alongside the common law courts. This system of law was called equity. As a consequence, there developed in England two separate and distinct legal systems that existed side by side with their own rules and their own courts. Decisions of the law courts were recorded from about 1289, but until the middle of the 18th century it was not possible for persons outside the law to locate and interpret the law. Since 1765, the decisions of the superior law courts have been reported and contained in what we may collectively call the law reports (you will find a list of abbreviations of Australian and English law reports in the front of this book under Answering legal questions). Common law courts and equity courts existed side by side in England until 1873. In New South Wales, Equity Courts existed much longer on their own, right up until 1972, when the common law and equity systems merged. The joining of the two jurisdictions meant that equitable principles would be recognised and enforced in common law courts. There are still separate common law and equitable jurisdictions in the Supreme Court, but this does not present any practical difficulties. There were, and there remain today, differences between equity and common law: • common law is a complete system of law, whereas equity comprises many isolated principles stating when a specific remedy will be given; • equitable rights are valid only against those persons specified by the court (rights in personam), while common law rights are valid against the whole world (rights in rem); [1.60] 5

Business and Corporate Law

• common law rights are enforceable at any time, subject to statutory limitation periods, while equitable remedies must be applied for promptly – the equitable doctrine of laches (delay) prevents the enforcement of a right where there is negligence or unreasonable delay in enforcing it; • unlike common law remedies, equitable remedies are completely at the discretion of the court; and • equitable remedies are only available where common law remedies are not adequate.

Statute law [1.70] In England, Parliament did not always exist. The king was originally regarded as having absolute power (the concept of the Divine Right of Kings). Following the signing of the Magna Carta in 1215 by King John the power of the kings was brought under some control. Parliament started to make statute laws, although originally legislation was made by the king after the business of Parliament was concluded. However, by the middle of the 15th century, laws were being drafted and discussed by the two houses of the English Parliament. From around 1850 the majority of English law comprised the laws passed by the Parliament in the form of statutes. Traditionally, statute laws were regarded as being the paramount form of laws, as legislation would override any conflicting common law or equity. By the later part of the 18th century three types of English law prevailed: • common law; • equity; and • statute law (legislation). Essentially, we inherited these three types of laws from England after the arrival of the First Fleet and settlement of the penal colony in New South Wales. Our legal system initially applied these types of laws and later developed and supplemented them.

RECEPTION OF ENGLISH LAW INTO AUSTRALIA IN 1788 [1.80] The First Fleet arrived in the new colony of New South Wales in 1788 carrying Captain Arthur Phillip, convicts, soldiers and sailors. Was the colony settled or conquered by the English? This question was decided by applying an English rule of law called the doctrine of reception. This doctrine meant that where inhabited colonies were gained by “conquest” or by “treaties” the existing laws of that place applied until superseded by the laws of the colonising power. This doctrine was based on the fact that the conquered colony had been occupied by people with some organised society recognised by the English. .However, where the colonies were considered to be “desert” and “uncultivated” (terra nullius), they were regarded as uninhabited and as a 6 [1.70]

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result, were considered settled by the English rather than conquered. The common law of England applied from the moment of colonisation or settlement. Following the arrival of the First Fleet the colony of New South Wales was regarded as “terra nullius”, meaning “uncultivated land”, “desert” or “land belonging to no-one” and as a result the laws of England were introduced and applied in the administration of justice. To a large extent the laws that were received after settlement comprised the English common law, equity and statute laws that could be appropriately applied to the colony. Not all English laws were appropriate to the conditions in the colony and to administration of a penal colony. The Governor determined what laws would apply and made new laws when necessary. The English Parliament continued to make statute laws not only for itself but also for the colonies, and the original law courts set up in the colony after 1823 were modelled on the English courts. The effect of this was a complete disregard for the customs and laws of the Aboriginal people. From a historical legal viewpoint Australia was regarded as having been settled and this continued from 1788 to 1992. In that year the High Court of Australia rejected terra nullius and recognised land rights for the indigenous people Later the Commonwealth Government passed laws that also, at least partly, recognised Aboriginal land (native) title. See the discussion of Mabo v Queensland (No 2) (1992) 175 CLR 1 (Mabo’s Case) later in this topic.

STEPS TOWARDS A NEW LEGAL SYSTEM IN NEW SOUTH WALES [1.90] Australia had been colonised for the purpose of transporting convicts and doubts soon arose about whether it could be treated like most other settled colonies where all English law initially applied. Certainly the law of England applied to the colony, but the problem was in determining whether all laws applied, or only some of them. In reality, the laws of England that applied to the colony were not unlimited. Only the laws that were applicable to the conditions of the colony were carried over. The first civil and criminal courts in New South Wales were headed by the colony’s Deputy Judge-Advocate. In criminal matters he sat with six naval or military officers. In deciding civil cases he sat with only a bench of two “fit and proper” residents of the colony appointed by the Governor. Most of the court officials were not legally trained and the largest problem was the absence of trial by jury. As the colony began to grow, its citizens, both free citizens and former convicts, saw it as their permanent home. They agitated for a definite legal system, limited self-government and certainty of laws.

New South Wales Government Act of 1823 (Imp) [1.100] From 1788 until about 1823, the Governors ruled the colonies without a colonial (local) legislature (Parliament). [1.100] 7

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As a result of demands for more local justice, the English government appointed a Royal Commission to investigate the colony’s judicial system. This led to the Third Charter of Justice and to the New South Wales Government Act 1823 (Imp). The latter Act established the Supreme Court of New South Wales, with a Chief Justice and three judges. The Supreme Court could deal with both criminal and civil matters. Trial by jury was also allowed in certain cases. The Charter granted the Chief Justice rank and precedence over all subjects except the Governor and Acting Governor and it provided for the appointment of court officers and for admission to court of legal practitioners. The Chief Justice appointed declared at the time that the laws of England were essentially the laws of the colony, that the colonial government was basically an English government and that the New South Wales courts were essentially the courts of England. The Act also established a Legislative Council comprising between five and seven people appointed by the Crown. The Governor was obliged, at least, to consult with the Council. One of the main problems however was that this body could only pass laws that were consistent with English law and that only the Governor could propose laws. This was not self-government as we know it but it was a beginning. Although there was little independence from England, these steps marked the start of an independent and separate legal system.

Australian Courts Act 1828 (Imp) [1.110] The next major event of importance was the Australian Courts Act 1828 (Imp). This Act gave limited self-government to the colony. This legislation required the Governor to consult with the Legislative Council which in turn was able to assist in the application of English law to New South Wales. The Act, which commenced on 24 July 1828, provided that: [A]ll laws and statutes in force within the realm of England shall be applied in the administration of justice in the courts of New South Wales so far as the same can be applied within [New South Wales] as at the date of the commencement of the Act.

The result of this law was that Acts such as the Habeus Corpus Acts and Statute of Frauds became law in New South Wales together with many common law principles relating to property, contracts and criminal offences. During the period from 1788 until 1828 criminal law in England had been substantially reformed and the colonies received the benefits associated with these reforms. English statutes passed after this date did not apply to New South Wales unless expressly or impliedly indicated by the statute. From 1828, the local legislatures, and the Commonwealth since 1901, have continued to vary and add to the law. As a result of the Act of 1823 and the Australian Courts Act 1828, English laws applied to New South Wales unless the Governor, with the advice of the Legislative Council, considered them inapplicable. 8 [1.110]

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By 1840 there was demand for the New South Wales Supreme Court to be given power to deal with equity matters. Thus the colonial Parliament passed the Administration of Justice Act establishing a separate equity jurisdiction for the Supreme Court.

New South Wales Government Act 1855 (UK) [1.120] Agitation for full self-government continued. By 1842, membership of the Legislative Council had expanded to 24 elected members and 12 members appointed by the Governor, but its law-making power was limited. It could still only legislate in a manner consistent with existing English law. In 1855, the British Parliament established a Constitution for New South Wales and created a Parliament. This Parliament was referred to as a bicameral (two chamber) legislature, as it consisted of two houses, the Legislative Assembly (lower house), and the Legislative Council (upper house). The Governor was the Queen’s representative and still occupied a powerful position. Parliament was given power to make laws for the peace, order and good government of New South Wales, but it was not clear if the Parliament could amend its own Constitution or whether it could make statutes that were inconsistent with laws made by the English Parliament. After the colonial Parliaments were established they became the main source of law. Occasionally England enacted laws that extended to the colonies, but generally our own Parliaments became the law-making bodies.

Colonial Laws Validity Act 1865 (UK) [1.130] There remained some doubt as to the legislative power of the colonial Parliament. Could it pass laws repugnant to English laws? Could it amend its own Constitution? At the request of the colonies, the British Parliament passed the Colonial Laws Validity Act 1865 (UK). This statute allowed colonial Parliaments to make their own constitutions and gave them full legislative power to override British statutes except where those statutes applied by paramount force. Paramount force existed where a British statute was passed with the specific intention that it was to apply to a colony, or where this was implied in the terms of the statute: eg due to the fear of rebellion or war, English law expressly prohibited any colony from raising a navy.

Commonwealth of Australia Constitution Act 1900 [1.140] As the colonies developed, so too did the feeling that there should be one nation on the Australian continent. After heated debate, and several Constitutional Conventions, the governments of the colonies agreed to federate and asked the British government to legislate to this end. Although it was possible to unite the country into one government and abolish the colonies, the framers of the Constitution believed that the colonies would not want to surrender all their law-making powers. The Constitution of the United States of America vested express powers in a federal government but allowed the [1.140] 9

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States to enjoy residual powers not vested in the federal system. The Commonwealth chose to follow the USA model. The Commonwealth of Australia Constitution Act 1900 (Imp), a British statute, created the Commonwealth of Australia. It commenced on 1 January 1901. It was this Constitution that created the three branches of the Commonwealth government. Figure 1.2: Three branches of Commonwealth government

Australia was classified as a dominion meaning it was now a self-governing country. The Constitution transformed the six independent colonies into States and left them as self-governing bodies with their own constitutions, Parliaments and courts of law. The consequence of establishing the Commonwealth was that a federal form of government was created. Under s 71 of the Constitution, the High Court of Australia was created. However, the appointment of the first judges was delayed until 1903 and the High Court had its first sitting in Melbourne on 6 October 1903. Originally the High Court was established to deal with constitutional matters and to handle appeals from any federal or State court. It had three judges in 1903 but with an increasing workload the number was increased to five in 1906 and the Commonwealth Parliament agreed to enlarge the court to seven judges in 1913. [1.150] The Commonwealth Constitution reflected the agreement between the colonial (State) politicians and those parties who drafted the Commonwealth Constitution. The colonial politicians wanted to protect their existing colonial law-making powers, which they held prior to federation in 1900. However, the Constitution granted both concurrent and exclusive powers to the Commonwealth Parliament to make laws. Part V – Powers of the Parliament Legislative powers of the Parliament 51. The Parliament shall, subject to this Constitution, have power to make laws for the peace, order, and good government of the Commonwealth with respect to: (i)

10 [1.150]

trade and commerce with other countries, and among the States;

Introduction to the Australian Legal System

(ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) (xiv) (xv) (xvi) (xvii) (xviii) (xix) (xx) (xxi) (xxii) (xxiii) (xxiiiA)

(xxiv) (xxv) (xxvi) (xxvii) (xxviii) (xxix) (xxx) (xxxi) (xxxii) (xxxiii) (xxxiv) (xxxv) (xxxvi)

| TOPIC 1

taxation; but so as not to discriminate between States or parts of States; bounties on the production or export of goods, but so that such bounties shall be uniform throughout the Commonwealth; borrowing money on the public credit of the Commonwealth; postal, telegraphic, telephonic, and other like services; the naval and military defence of the Commonwealth and of the several States, and the control of the forces to execute and maintain the laws of the Commonwealth; lighthouses, lightships, beacons and buoys; astronomical and meteorological observations; quarantine; fisheries in Australian waters beyond territorial limits; census and statistics; currency, coinage, and legal tender; banking, other than State banking; also State banking extending beyond the limits of the State concerned, the incorporation of banks, and the issue of paper money; insurance, other than State insurance; also State insurance extending beyond the limits of the State concerned; weights and measures; bills of exchange and promissory notes; bankruptcy and insolvency; copyrights, patents of inventions and designs, and trade marks; naturalization and aliens; foreign corporations, and trading or financial corporations formed within the limits of the Commonwealth; marriage; divorce and matrimonial causes; and in relation thereto, parental rights, and the custody and guardianship of infants; invalid and old-age pensions; the provision of maternity allowances, widows’ pensions, child endowment, unemployment, pharmaceutical, sickness and hospital benefits, medical and dental services (but not so as to authorise any form of civil conscription), benefits to students and family allowances; the service and execution throughout the Commonwealth of the civil and criminal process and the judgments of the courts of the States; the recognition throughout the Commonwealth of the laws, the public Acts and records, and the judicial proceedings of the States; the people of any race for whom it is deemed necessary to make laws; immigration and emigration; the influx of criminals; external affairs; the relations of the Commonwealth with the islands of the Pacific; the acquisition of property on just terms from any State or person any purpose in respect of which the Parliament has power to make laws; the control of railways with respect to transport for the naval and purposes of the Commonwealth; the acquisition, with the consent of a State, of any railways of the State on terms arranged between the Commonwealth and the State; railway construction and extension in any State with the consent of that State; conciliation and arbitration for the prevention and settlement of industrial disputes extending beyond the limits of any one State; matters in respect of which this Constitution makes provision until the Parliament otherwise provides;

[1.150] 11

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(xxxvii)

(xxxviii)

(xxxix)

matters referred to the Parliament of the Commonwealth by the Parliament or Parliaments of any State or States, but so that the law shall extend only to States by whose Parliaments the matter is referred or which afterwards adopt the law; the exercise within the Commonwealth, at the request or with the concurrence of the Parliaments of all the States directly concerned, of any power which can at the establishment of this Constitution be exercised only by the Parliament of the United Kingdom or by the Federal Council of Australasia; matters incidental to the execution of any power vested by this Constitution in the Parliament or in either House thereof, or in the Government of the Commonwealth, or in the Federal judicature, or in any department or officer of the Commonwealth.

Concurrent law-making powers [1.160] Most of the law-making powers granted to the Commonwealth (Federal) Parliament under the Constitution are concurrent powers. This means that these powers can be exercised by both the Commonwealth and the State Parliaments at the same time. It was decided that until such time as the Commonwealth Parliament was in a position to take control, its law-making powers were identified as concurrent powers. Under s 51 of the Commonwealth Constitution, there are 39 areas in which the Commonwealth Parliament was granted power to make laws. As these were concurrent powers this meant that any of the States could also make laws (legislate) in these areas at the same time as the Commonwealth. As a result, Commonwealth and State laws could co-exist provided that those laws were not inconsistent or in conflict with each other. The existence of law-making powers common to both the Commonwealth and the States raises the obvious question: What if there is a conflict or inconsistency between a valid State law and a valid Commonwealth law? This potential problem was addressed by s 109 of the Commonwealth Constitution, which declared that where there is a conflict between valid State legislation and valid Commonwealth (federal) legislation, the Commonwealth law shall prevail and the State law, to the extent that it was inconsistent with the Commonwealth law, shall be invalid. As a result of this section, any conflicting State laws could be partially or totally invalid. A good example of the impact of s 109 can be observed in a High Court case from 1994. Case study [1.170] In Wallis v Downard-Pickford (North Queensland) Pty Ltd (1994) 179 CLR 388, the plaintiff engaged the defendant carrier to transport household furniture. During delivery, the goods were damaged and the plaintiff asked for damages of $1,663. A State Act limited the liability of the carrier for lost or damaged goods to only $20. The carrier claimed that it was only liable to pay the plaintiff $20 under the State Act. The plaintiff claimed he was entitled to compensation for breach of the Trade Practices Act 1974 (Commonwealth law). The Trade Practices Act 1974 implies, in every contract in which a corporation 12 [1.160]

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supplies services, a promise to supply those services with reasonable skill and care. It does not limit the amount of damages that can be recovered. The High Court confirmed that a contract of carriage was a contract for the supply of services and so the Commonwealth Act applied. The Trade Practices Act 1974 was a valid exercise of Commonwealth law-making power. The State Act was also a proper exercise of State legislative power. There was a conflict between laws; the State Act limited the amount of damages, while the Commonwealth Act had no limits. Section 109 operated to make the State Act invalid to the extent that it was inconsistent with the Commonwealth Act. The carrier had to pay the full amount of damages under the Commonwealth law.

Exclusive law-making powers [1.180] It should be noted that the States are autonomous and independent from each other and the Commonwealth. State governments are not answerable to the Commonwealth government. They all work together to create administer, interpret and enforce the various laws they make. However, certain law-making powers are expressed by the Constitution as exclusive to the Commonwealth and this means that only the Commonwealth Parliament can make laws on these topics. The Constitution confers on the Commonwealth Parliament exclusive powers to make laws in relatively few areas, such as: • s 52 – to make laws about the Commonwealth Government and matters relating to the Commonwealth public service; • s 90 – to make law about customs, excise and bounties; • s 114 – prevents States from raising or maintaining any naval or military force without Commonwealth consent; • s 115 – States are not permitted to coin money; and • s 122 – to make laws about the government of the Territories. The effect of granting exclusive powers to the Commonwealth means that only the Commonwealth Parliament can make laws in certain areas and the States cannot do so. Any attempts by the States to legislate in areas of exclusive Commonwealth powers are totally invalid (unconstitutional). In Commonwealth of Australia v Australian Capital Territory [2013] HCA 55 the Legislative Assembly of the ACT Parliament passed legislation called the Marriage Equality (Same Sex) Act 2013 that recognised same sex marriages. At this time the ACT was the only State/Territory to do so. The Commonwealth challenged the validity of the law. The High Court stated that under s 51(xxi) of the Commonwealth Constitution only the Commonwealth Parliament had power to legislate with regard to “marriage” (that included same sex marriages) and the Commonwealth could later choose to include “same sex marriages” in its legislation. This would be a matter solely for the [1.180] 13

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Commonwealth. The ACT legislation was inconsistent with either or both of the Commonwealth laws (the Marriage Act 1961 and Family Law Act 1975) and as such could not operate concurrently with the Commonwealth laws. As a result the ACT law was wholly inoperative. In R v Alqudsi [2015] NSWSC 1222, A was tried for breach of s 7(1)(e) of the Crime (Foreign Incursions and Recruitment) Act 1978 (Cth). The Act prohibited a person providing assistance with the intention of supporting/promoting incursions into foreign states to engage in hostile activities. H was alleged to have assisted seven men in secretly leaving Australia to fight in armed hostilities against the Syrian government. A challenged the constitutional validity of the legislation. The Commonwealth relied upon its constitutional powers including s 51(xxix), ie power to make laws with respect to external affairs. The NSW Supreme Court held that s 7(1)(e) was a constitutionally valid law. In this case the Commonwealth had power to make such a law. It was shown that the conduct involved entry into a foreign state with intention to engage in hostilities which certainly would adversely affect Australia’s external relations and the main purpose of the Act involved external affairs.

Powers over the Territories [1.185] The Commonwealth Constitution granted power to the Commonwealth Parliament to make laws about the Territories that had either been acquired by the Commonwealth or surrendered by the States. The two major mainland territories are the Northern Territory and the Australian Capital Territory (ACT). The Commonwealth Parliament has granted a large amount of self government to both these territories. In most areas these territories function in a similar way to the States. However, the Commonwealth retains the power to override any legislation of the Territory Parliaments. In addition to the mainland territories, there are seven Territories outside Australia including Christmas Island and Jervis Bay. In respect of these Territories the Commonwealth Parliament can make laws on any subject and does not share its law-making power with the State Parliaments.

Residual law-making powers [1.190] The Commonwealth Constitution effectively recognised and preserved the States and their powers. Each State had their own Constitution under which they have the power to make laws about various State matters. Under s 106 of the Commonwealth Constitution the Constitution of each State was preserved and s 107 allowed for every law-making power of the State Parliaments to continue unless such power was either vested exclusively in the Commonwealth or withdrawn from the States. This means that the States keep their law-making powers unless they are given back to the Commonwealth. Anything not expressly identified as either an exclusive or a concurrent power in the Commonwealth Constitution was a power that resided with the States. This meant that only the States can make laws in certain areas and these 14 [1.185]

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law-making powers are called residual powers. The residual powers of the States include the power to make laws in relation to: • health; • education; • local government; • transport; • criminal law; and • contract law. Any attempt by the Commonwealth Parliament to legislate in such areas would be totally invalid (unconstitutional) as the Commonwealth does not have law-making powers in those areas. Figure 1.3: Federal and State powers

Under s 76 of the Commonwealth Constitution, the High Court was granted original powers to interpret the Constitution and to deal with any disputes regarding State and federal law-making powers. A recent example of the High Court dealing with a constitutional dispute is the case of Pape v Commissioner of Taxation (2009) 238 CLR 1; [2009] HCA 23 when Kevin Rudd announced the Commonwealth was responding to the global economic crisis by passing laws to pay “tax bonuses” of $250-$900 to Australian workers whose taxable income did not exceed $100,000. The Commonwealth passed two laws called the Tax Bonus for Working Australians Act (No 2) 2009 (Cth) and the Tax Bonus for Working Australians(Consequential Amendments) Act (No 2) 2009 (Cth). These formed part of the economic stimulus package. Bryan Pape challenged the legislation claiming the payments were “gifts” and were not supported by the taxation power in the Constitution ie the laws were unconstitutional. The High Court by a majority of 6:1 found that both Acts were valid as the [1.190] 15

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Commonwealth had powers under s 51(ii) taxation, s 51(xxix) external affairs and s 51(i) trade and commerce to make such laws. The Constitution Act did not remove the right to appeal to the Privy Council (the highest English court). The Act did, however, prevent appeals to the Privy Council from the decisions of the High Court in certain categories of constitutional law unless the High Court gave its permission.

Statute of Westminster 1931 (UK) [1.200] At the request of the governments of those countries considered still to be dominions of Britain, the British Parliament agreed and declared in the Statute of Westminster 1931 (UK) that it would no longer legislate with respect to a dominion, unless that dominion requested it to do so. The term dominion included the Commonwealth of Australia but did not include former colonies such as New South Wales. The Statute was not to take effect in respect of a dominion unless and until the Parliament of that dominion ratified it. The Australian Parliament did this in the Statute of Westminster Adoption Act 1942 in 1942. This Act was made retrospective to 3 September 1939. This meant that the Commonwealth could amend or repeal a British law whether or not such a law applied by paramount force. It also meant that the Colonial Laws Validity Act 1865 did not apply to the Commonwealth and that the Commonwealth could pass extraterritorial laws. Extraterritorial laws are those that are expressed to apply outside the territory of the individual Parliament. For example, the Commonwealth might pass a law to confiscate property situated in America that belongs to Australian citizens. This would be a law that Australian courts would enforce, but would have no practical application unless American courts recognised it.

Privy Council (Appeals from the High Court) Act 1975 (Cth) [1.210] In 1975 the Federal Parliament abolished the right to appeal to the Privy Council from decisions of the High Court. However, it was still possible, on questions of State law, to appeal directly from a State Supreme Court to the Privy Council.

Australia Acts 1985 and 1986 [1.220] The States and the Commonwealth requested the British Parliament to pass legislation ending the legal and political relationship between the United Kingdom and Australia. The purpose of the legislation was to confirm the status of Australia as a “sovereign independent and federal nation”. These Acts consisted of laws passed by each State Parliament, the Commonwealth Parliament and the United Kingdom Parliament and were collectively called the Australia Acts of 1985 and 1986. The main effects of the Australia Acts are: 16 [1.200]

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• no statute of the United Kingdom passed after 1986 applies to the Commonwealth or States; • States can make extraterritorial laws to apply to citizens residing overseas; • the Colonial Laws Validity Act 1865 no longer applies to the States; • the States can repeal or change any United Kingdom laws; • the United Kingdom government has no further responsibility for any State; and • appeals from State Supreme Courts to the Privy Council (in England) were abolished. The Australia Acts ended once and for all the power and the responsibility of the United Kingdom government in relation to Australian matters. As seen above the Australia Acts also ended the practice of English courts being involved in State matters. Appeals from State courts to the Privy Council were finally and permanently abolished and this confirmed the High Court as the final court of appeal – the most important and powerful court in Australia. It meant that the decisions of the High Court were to be followed in preference to the Privy Council.

The High Court and the doctrine of terra nullius [1.230] In 1992, the High Court in Mabo v Queensland (No 2) (1992) 175 CLR 1 rejected the concept of terra nullius and gave partial recognition to Aboriginal land rights. Case study [1.240] In Mabo's Case a claim was brought by Eddy Mabo and others on behalf of the Meriam people concerning the occupation of a group of islands called the Murray Islands in the Torres Strait between Queensland and New Guinea. In 1879 the Murray Islands were annexed to Queensland and thereafter became subject to the laws of Queensland. The plaintiffs alleged that they had had continuous ownership of the land and that any land rights of the Queensland government had to be subject to their rights based on local customs and traditional title. The High Court agreed that the plaintiffs were entitled to occupation, possession, enjoyment and use of the islands, as they were held to have belonged to them. The Court agreed that under common law there was a form of land ownership called native title. Although the words “native title” were not defined by the Court, the judges described it as comprising the common law rights and interests in land of any particular body of Aborigines or Torres Strait Islanders according to their own traditions, customs and laws. The High Court held that Australia was not terra nullius when colonised by the English in 1788 and that there was a form of land ownership recognised by the Aboriginal people. At [15] the Court said that Australian common law “recognises a form of native title, which, in other cases where it has not been extinguished, reflects the entitlement of the indigenous inhabitants in [1.240] 17

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accordance with their laws or customs, to their traditional lands”. The High Court held that these rights should be recognised unless there was a subsequent exercise of control by the appropriate Parliament over the particular landholding. Brennan J stated that the facts as we know them today do not fit the absence of law or barbarian theory underpinning the colonial reception of common law. He added there was no warrant for applying today rules of the English common law which were the product of that theory. He stated that it would be a curious doctrine to declare that, when the benefit of the English common law was first extended to the colony its first effects were to strip indigenous people of their rights to occupy their ancestral lands. As to the general law, Brennan J said that the English common law doctrine had been founded on unjust discrimination and needed to be reviewed. He added the qualification that this does not mean that we can return totally to the position as it was before colonisation. The Court acknowledged that factors such as the expectations of the international community and the contemporary values of the Australian people put pressure on the common law to recognise the rights and interests of the Aboriginal people in the land.

[1.250] It seems that where the Crown has issued a Crown grant over a parcel of land, the native title is extinguished. Where, however, there has been no Crown interference, the original title remains, so long as the applicant can show some form of historical continuity of title. The extent of the interference is uncertain but Brennan J clearly indicated that a grant of freehold title would extinguish the native claim. Thus native title has been extinguished by grants of estates of freehold or of leases but not necessarily by the grant of lesser interests (eg authorities to prospect for minerals). As a consequence of Mabo’s Case the Commonwealth Parliament passed the Native Title Act 1993 to recognise and protect the rights of indigenous people. The Act created the Native Title Tribunal to determine land claims and compensation payments for those who lost their land. The preamble to the Act states its purpose is to remedy past injustices and protect Aboriginal and Torres Strait Islanders, and to provide certainty for the rules as to when native title can be extinguished. Applicants apply to the Federal Court for a determination of native title and any claim for compensation. Following this, each State and Territory passed their own legislation dealing with native title. The question of whether or not native title is extinguished by the grant of a pastoral lease came before the High Court in Wik People v Queensland (1996) 187 CLR 1. In that case, the Court held that the grant of a particular type of pastoral lease in Queensland did not extinguish whatever native title rights existed over the land contained in the leases. This meant that it was possible for two types of interest to exist simultaneously over the same parcel of land: the rights of 18 [1.250]

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the holder of the lease and the rights of the native title holders. The Court said that where there was a conflict between these rights the rights of the leaseholder would take precedence. It should be noted that there are many kinds of pastoral lease in Australia. The Wik decision relates only to particular types; it may well be that other categories of grants of pastoral lease do extinguish native title. [1.260] The possibility that the judgments in Mabo’s Case might allow recognition of Aboriginal customary law in criminal cases was excluded in a decision by the Chief Justice of the High Court in Walker v New South Wales (1994) 182 CLR 45. In that case, Walker was charged with an offence against New South Wales criminal law. He applied to the High Court for an order that the proceedings be dismissed or alternatively stayed because the Commonwealth and States lacked the power to make laws affecting Aboriginal people without their request and consent. He also claimed that Aboriginal people were not bound by laws until those laws had been adopted by the Aborigines. The High Court rejected these claims, holding that the Aboriginal people were subject to the laws of the Commonwealth and States and Territories in which they lived. Mason CJ said that there was nothing in Mabo’s Case to support the argument of the plaintiff and restated the comments he made in Coe v Commonwealth (1979) 53 ALJR 403: Mabo is entirely at odds with the notion that sovereignty adverse to the Crown resides in the Aboriginal people of Australia. The decision is equally at odds with the notion that there resides in the Aboriginal people a limited kind of sovereignty embraced in the notion that they are a domestic dependent nation entitled to self-government and full rights. [(1993) 68 ALJR 110 at 115]

The High Court held that it was a basic principle that all people should stand equal before the law. A construction that results in the application of different criminal sanctions to different persons for the same conduct offends that basic principle. The Court recognised that just as all persons in the country enjoy the benefits of domestic laws, so also must they accept the burdens of those laws as well. The Court noted that even if the customary criminal law had survived British settlement, it had long been extinguished by general criminal statutes. The High Court has heard a variety of so-called “test cases” in the relatively new legal area of native title. This legal issue is in a constant state of change and has become extremely complex. Since Mabo’s Case there has been a large amount of litigation on the impact and extent of native title including (but not limited to) the following decisions made by the High Court and Federal Court: • recognition that native title is extinguished by ownership in fee simple and is not revived if the Crown again acquires the land – Fejo v Northern Territory (1998) 195 CLR 96; [1.260] 19

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• recognition that native title applies to the sea but the rights are not exclusive – Commonwealth v Yarmirr; Yarmirr v Northern Territory (2001) 208 CLR 1; [2001] HCA 56; • recognition that native title comprises a bundle of rights which can be partially extinguished by pastoral leases – Western Australia v Ward; Attorney – General (NT) v Ward; Ningarmara v Northern Territory (2002) 213 CLR 1; [2002] HCA 28; and • understanding that any native title claim must be proven to derive from traditional laws and customs observed since sovereignty – Members of the Yorta Yorta Aboriginal Community v Victoria (2002) 214 CLR 422; [2002] HCA 58; • in a recent native title claim for substantial portions of Western Australia (including parts of Perth) the Full Federal Court stated it was necessary under s 223 of the Native Title Act 1993 to establish there was a continuous acknowledgment and observation of the traditional laws and customs by the claimants from sovereignty until recent times and that there was a connection with the identified lands – Bodney v Bennell (2008) 167 FCR 84; [2008] FCAFC 63 (23 April 2008); • the Native Title Act 1993 was amended by the Howard Government in 2007 by the passage of the Native Title Amendment Act 2007 (Cth) and later by the Rudd government with the Native Title Amendment Act 2009 (Cth); • in Akiba v Commonwealth (2013) 250 CLR 209; [2013] HCA 33 the High Court dealt with a claim that successive fishing legislation had extinguished any traditional native title rights to take fish or other marine life from the waters in and around Torres Strait. The High Court disagreed and for the first time recognised native title rights/interests to fish for commercial purposes in Torres Strait; • in Karpany v Dietman (2013) 252 CLR 507; [2013] HCA 47 there was a similar case and the High Court followed its previous reasoning in Akiba’s case and unanimously decided that the Fisheries Act regulated but did not extinguish native title rights to fishing and these rights continued to be enjoyed; and • in 2014 the High Court favoured the position that native title could co-exist with various types of leases. In Western Australia v Brown [2014] HCA 8 it was recognised that Native Title was merely suspended and not extinguished by a Pilbara mining lease granted in the 1960s to BHP. The WA government and BHP had argued that the mining lease permanently extinguished all native title rights to the land but the High Court unanimously agreed that the traditional rights (camping/ceremonies/taking resources) were revived and had full effect once the mining operations had ceased and infrastructure removed. The decision may have implication relating to pre-1975 pastoral leases, mining leases and some other specific purpose lease (depending on whether they grant exclusive possession). 20 [1.260]

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The Federal Court of Australia’s website displays a current list of “Priority Native Title cases” and there are no less than 92 cases listed for trial/ determination in 2017 (see http://www.fedcourt.gov.au).

DEVELOPMENT OF LEGAL SYSTEMS IN OTHER STATES [1.270] For readers interested in the origins of the other States and Territories the position can be summarised as follows.

Western Australia [1.280] In the early 1800s the British were worried about French colonisation and so in 1826 a settlement was established at King Georges Sound. Later a colony was set up at Swan River with town sites at Fremantle and Perth. Western Australia gained the right of self-government in 1890 and joined the other five States to form the Commonwealth of Australia in 1901.

Queensland [1.290] In 1824 a temporary settlement was established at Redcliffe and later transferred to the area where Brisbane is now located. In 1839 convicts were no longer transported and the Brisbane penal settlement was closed and from 1842 free settlement was permitted. In 1859 Queen Victoria signed Letters Patent to form the colony of Queensland to be separated from New South Wales and to appoint its first Governor.

Victoria [1.300] The first successful British settlement occurred at Portland in 1834. Melbourne was founded in 1835 by John Batman. In 1850 Queen Victoria signed a British Act of Parliament that separated Victoria from New South Wales and gave the colony its name and a Constitution.

South Australia [1.310] The British Parliament passed the South Australian Colonisation Act 1834 that allotted over 802,000 square kilometres of land to be used as a convict free colony. South Australia became a self-governing colony in 1856 with the approval of a new constitution by the British Parliament.

Tasmania [1.320] The first settlement occurred in 1803 with the early settlers being mostly convicts and military officers. It was proclaimed a separate colony from New South Wales with its own judicial system and Legislative Council on 3 December 1825. [1.320] 21

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Northern Territory [1.330] Following settlement in 1788 many unsuccessful attempts were made to settle the northern coastal areas. In 1862 the Northern Territory was annexed by South Australia by Letters Patent. In 1869 a small settlement was established at Port Darwin. On 1 January 1911 (10 years after Federation) the Northern Territory was separated from South Australia and placed under the control of the Commonwealth. Legislation was passed appointing an Administrator to manage the Territory on behalf of the Australian Government. In 1978 the Territory was granted responsible government with a Legislative Assembly headed by a Chief Minister.

Australian Capital Territory (ACT) [1.340] In 1909 New South Wales transferred land for the creation of the Federal Capital Territory to federal control. In 1910 laws were passed creating the legal framework for the Australian Capital Territory (ACT). The laws for the Territory could be made by the Commonwealth and placed the ACT under the jurisdiction of the NSW Supreme Court. The laws also stated that land could not be owned as freehold but had to be leased. Land in the ACT is held under 99 year leases. The ACT was placed under the control of the Commonwealth. In 1934 the ACT received its own Supreme Court and in December 1988 the ACT was granted full self-government.

SOURCES OF LAW [1.350] Our law comes from several sources, including: • common law (judge-made); • equity (judge-made); • statute law; • delegated legislation; • international law.

Common law [1.360] As you have read, the Australian system of law, as with most other countries originally colonised by the English, is a common law system. In this context we are referring to the common law as a source of law from the courts, historically based on customs, and developed through the doctrine of precedent. It is in this sense that common law is discussed in this topic. Common law is the non-statutory law belonging to the courts. The common law is judge-made law that stems from the decisions of judges in the courts. Important decisions are published in what are called law reports and judges are guided by previous decisions from higher courts under the judicial rule 22 [1.330]

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known as the doctrine of precedent. The primary remedy at common law was damages (money). In reality the laws made by the judges cover both common law and equity.

Equity [1.370] As previously discussed, equity was a form of non-statutory law made by the judges in courts and developed through the doctrine of precedent. Equity has its basis in rules of fairness and justice and historically developed as a separate and distinct system of law alongside the common law. Traditionally, equity had its own rules and procedures and also its own courts. Equity applied where the common law provided no remedy, or at least no adequate remedy, and equitable remedies differed from the common law with the provision of specific performance and injunctions. Today there are no separate equity courts except the Equity Division of the Supreme Court of New South Wales.

Statute law [1.380] As we have seen, laws made by Parliament are called statutes or Acts of Parliament. The law-making power of both State and Federal Parliaments comes from their respective constitutions. Statute law is considered the paramount form of law as it traditionally overrides both common law and equity where there is a conflict. There is a constitutional principle known as the sovereignty of Parliament. This principle states that Parliament can make or unmake whatever law it likes. In Australia, however, where Parliaments must comply with their own written constitutions and where the High Court can declare a law invalid as being in breach of the Constitution, the notion of sovereignty of Parliament is not as effective. Where a Parliament in Australia acts within its constitutional powers, we can say that it has parliamentary sovereignty. It can make or unmake any law where it has the constitutional power to make laws. Leaving aside the few British statutes that still apply, the statute laws (legislation) that affect us are those made by the Commonwealth Parliament and the Parliaments of our individual States and Territories.

FORM OF A STATUTE [1.390] You will note from the front page of the ASIO statute below that it has certain similarities with a book. Certain features common to all legislation are: • title (a name); • date; • definition of specific words in the Act; • chapters; and [1.390] 23

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• numbered paragraphs are called sections. Figure 1.4: An example of an Act

Composition and features of the Commonwealth parliament [1.400] Australia has a federal system of government with a national (Commonwealth/Federal) Parliament and Parliaments in each State and Territory. The supreme law-making body in Australia is the Commonwealth Parliament which comprises two (2) divisions (houses): the House of Representatives (known as the Lower House) and the Senate (known as the Upper House). Australia is a constitutional monarchy. Our head of state is, for historical reasons, the Queen of England, who is also the Queen of Australia. The Queen does not play any real role in Australian politics. She appoints the Governor-General on the recommendation of the Prime Minister and she appoints State Governors on the recommendation of the State Premiers. The Governor-General is the Queen’s representative in Australia on a national level and the Governor is her representative in each State/Territory. One of the main functions of the Governor-General and the Governor is to give 24 [1.400]

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Royal Assent to laws passed by the Commonwealth Parliament and the State/Territory Parliaments. This is done by signing the laws when passed by Parliament. The Commonwealth Parliament is elected by votes from all Australian citizens over the age of 18 in federal elections. The Commonwealth Parliament is composed of all members of both the upper and lower houses and the government is formed by the political party which has the majority of seats in the Lower House. Ministers are members of the government who are delegated responsibility for particular government departments, eg foreign affairs or treasury. The Cabinet is formed from some or all of the Ministers and its function is to decide on policy/laws to be drafted and submitted to parliament. Table 1.1: Commonwealth (Federal) Parliament House of Representatives (Lower House) The Senate (Upper House) Leader of government Cabinet Queen’s Representative Executive Council

Each member elected from national electorates. There are 150 members. Each member elected from State voters. Each State has 12 representatives and each Territory has 2 representatives. The Senate has 76 members. Prime Minister Senior Ministers & Prime Minister Governor-General Governor-General and 2 Ministers to approve legislation passed by Parliament.

THE MAKING OF A STATUTE [1.405] As the main function of the Commonwealth Parliament is the making of laws (legislation) in the form of statutes, how then are statutes made? Commonwealth Parliament creates a Bill into an Act of Parliament by voting the Bill through the following stages. Table 1.2: Making a statute Ideology Drafting First Reading Second Reading Committee Examination Third Reading Submission to Senate

Members/pressure groups/law reformers may apply pressure for introduction of a new law. Cabinet examines the proposal for a new law and, if agreed, submits proposal to draftsmen to prepare law in an acceptable form for possible legislation. This is called a “Bill”. Minister introduces Bill into lower house and copies are given to members to read and consider for several days. Lower House debates broad concepts of the proposal and votes taken. If majority vote in its favour it may proceed to next stage. House forms a committee and closely examines Bill and may require input from specialists. Changes are often made to the Bill. If Bill passes through committee stage it is read again and voted upon. If majority vote in its favour then Bill proceeds to the Upper House (Senate). The same whole procedures follow as in Lower House. If finally approved by Senate it is assented to by Governor-General and Bill then becomes law, ie Act of Parliament/Statute.

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Composition and features of State/Territory parliaments [1.410] In each State/Territory the supreme law-making bodies are the State/Territory Parliaments. State and Territory parliaments are elected. All voting citizens in each State must vote in State elections for the members of their parliaments. Just like the Commonwealth, all State/Territory parliaments (except Queensland) are bi-cameral. This means they have two houses: a Lower House and an Upper House. The use of the word “upper” does not mean that this house is superior to the lower house; indeed the reverse is probably true. These parliaments are also composed of all members of both houses and the State government is formed by the political party which has the greater number of seats in the Lower House. Laws must be assented to by the Queen and this is done through her representative on a State level, ie the Governor who signs the laws after they have been passed by parliament. State parliaments are similar in their composition and functions (except Queensland) and the table below relates to the NSW Parliament. Table 1.3: New South Wales Parliament Legislative Assembly (Lower House) Legislative Council (Upper House) Leader of government Cabinet Queen’s representative Executive Council

Members elected in State electorates. Legislative Assembly has 93 members. Members voted for by State citizens. Legislative Council comprises 42 members. The Premier of NSW Consists of all Ministers The Governor Governor and some Ministers to enable legislation to be put into effect/operation

The procedure for making statute law is the same in State parliaments as with the Commonwealth process, ie passage and voting through both houses and assent by Governor. In summary, Parliaments are bodies of elected representatives which introduce and debate legislation, pass legislation, amend or reject legislation and, where necessary, delegate authority to others to make laws.

Extension of Commonwealth legislative powers [1.420] Over time the law making powers of the Commonwealth Parliament have been extended due to two main reasons: 1.

the use by the Commonwealth of its financial powers First impressions suggest that s 51 of the Commonwealth Constitution limited the areas of Commonwealth influence or control but s 96 of the Commonwealth Constitution declares that the Commonwealth has the power to grant money to any State “on such terms and conditions as the Parliament thinks fit”. Only the Commonwealth Government collects personal income tax and the main source of income for the State

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governments is the money supplied to them by the Commonwealth government. This means that the Commonwealth can make grants to States on conditions that States implement certain policies in their areas of law-making responsibilities, eg education/health. Such grants are linked/tied to a particular purpose and as such are referred to as “tied grants” and have been implemented to give the Commonwealth some influence over State matters. States, however, are not constitutionally bound to accept such grants and can refuse to do so and not implement suggested policy conditions. This means that even where a particular matter falls within the “residual power” of the States, the Commonwealth may be able to influence the making of State laws in that matter by taking advantage of the financial dependence of the States on the Commonwealth for funding. This has allowed the Commonwealth to intrude into State legislative areas. 2.

the liberal interpretations of the Commonwealth Constitution by the High Court of Australia One example of a liberal interpretation of the Commonwealth’s law-making powers was the Trade Practices Act 1974 (Cth). This was a Commonwealth statute that, among other things, protected consumers against unfair and restrictive practices in trade and commerce. For example, s 52 of the Trade Practices Act 1974 prohibited any conduct by a company, in trade or commerce, that was misleading or deceptive or likely to mislead or deceive. Section 53 prohibited a company making various types of false or misleading statements about goods and services. If you look carefully at s 51 reproduced in this topic, you will see that there is no direct power granted to the Commonwealth Parliament to make laws about consumer protection. How then, could the Commonwealth make a law about the protection of consumers if the Commonwealth Constitution did not supply that law-making power? Under s 51(xx) the Commonwealth has power to make laws about companies. Also, under s 51(v), the Commonwealth has power to make laws about postal, telephone and other like services (including radio and television). Under s 51(i) the Commonwealth was given power to make laws about interstate and overseas trade. By indirectly using these other law-making powers under the Constitution, the Commonwealth overcame its lack of power over consumer protection by making laws to protect consumers that applied to the following businesses: • corporations; • sole traders/partnerships engaged in interstate or overseas trade; and • sole traders/partnerships using post, telephone, email, faxes, radio, TV and newspapers in conducting business and promoting products. [1.420] 27

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However, due to constitutional limits the Trade Practices Act 1974 did not cover all consumer matters and the States passed their own Fair Trading Acts to fill in any gaps. This meant that there were both Commonwealth and State laws covering similar matters with some duplication. The Competition and Consumer Act 2010 (Cth) was introduced in 2011 by the Commonwealth Parliament. This new law was created by the Commonwealth as a national consumer protection law and was adopted and applied by the States. It fully replaced the Trade Practices Act 1974 (Cth) and the various State consumer laws. It is now recognised as a national law applying across Australia. States remain involved in the implementation of these laws as these laws apply to every State and Territory. (Consumer law is more fully covered in Topic 5.) This has meant that the Commonwealth Parliament’s powers have been effectively extended beyond the constraints of s 51.

Delegated legislation [1.430] Parliaments do not have enough time to draft, debate and enact every rule and regulation they believe necessary in the public interest. Certain complex and technical rules are better left to appropriately qualified experts rather than politicians. Often parliaments will pass legislation designed to achieve broad objectives but will then delegate authority to make rules, regulations or by-laws to a branch of the executive government eg local councils or government departments/agencies or even courts. This is called delegated legislation. In effect Parliaments give some of their law-making authority to other bodies but retain ultimate responsibility for what these bodies do. Parliaments delegate the authority through acts of parliament called “Enabling Acts”. Usually this delegated legislation is created without any public debate and may not even be tabled in Parliament. This type of legislation is often referred to as subordinate legislation because the bodies making these laws are subordinate to Parliament and these laws are not statutes and therefore do not have the same authority. Parliament may abolish these laws altogether and the bodies are always subject to and limited by the authority granted to them. Some examples of bodies that have been granted delegated authority include: • local government (Councils); • government departments such as NSW Department of Edication and Training and the Commonwealth Department of Defence; and • statutory bodies such as the Australian Broadcasting Commission (ABC) and the Reserve Bank. Examples of delegated legislation include regulations, by-laws, ordinances, rules, proclamations and orders. A regulation is a general law traditionally made by the government through the Governor-General (federal) or the 28 [1.430]

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Governor (State). A by-law is generally a law applicable to a localised area such as a particular city or large town. The term “by-law” describes regulations made by local councils. The limitations on law-making powers set out in the Commonwealth Constitution also apply to delegated legislation. If the Commonwealth or State parliaments lack the original/initial power to make a law in a particular area then the delegated authority also lacks power to make the law. Section 109 of the Commonwealth Constitution also applies in relation to delegated legislation. Where the Commonwealth has delegated its power to make laws under its exclusive or concurrent legislative powers, regulations made properly by that delegated body prevail over an inconsistent State law, whether statute or regulation.

JUDGE-MADE LAW [1.440] The common law and equity developed, and continue to develop, through the decisions of judges and the application of the rules of precedent. Each decision made by a judge resolves the specific dispute before the court. The principles of precedent require that where a decision is made by a superior court, inferior courts must make the same decision in similar cases. The decisions of superior courts are reported in law reports, both official and unofficial, thus building up the body of case law. Details of how to understand the references to cases and how to find them are contained at the front of this book in the section headed “Answering Legal Questions”.

RELATIONSHIP BETWEEN JUDGE-MADE LAW AND STATUTORY LAW [1.450] Legislation prevails over judge-made laws; whenever there is a conflict between statute law and judge-made laws the statute will be followed. Parliament is the primary law-making body and represents society as a whole. However, despite the fact that legislation may replace certain areas of judge-made law, the role of the judicial system remains important. Judges are required not only to make and enforce common law and equitable principles but also to interpret and enforce legislation. You will be studying contract law later in this text. The law of contract in Australia consists of both judge-made laws (common law and equity) and also statute law (federal and State). Courts have traditionally made and enforced common law and equitable rules, but with the dramatic increase in statute law the role of the courts has been altered. Besides making laws in areas not covered by legislation, courts are also involved in the interpretation of statutes. It is the responsibility of the magistrates/ judges to decide the meaning and nature of a particular statute. Courts are limited to interpreting the words of legislation. No court is permitted to say, “We do not like this Act, and so we shall change it”. Courts have no power to change or delete any words found in a statute. Only [1.450] 29

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Parliament has the authority to amend or abolish legislation. The role of the court is to give effect to the meaning of the words found in legislation. When a court is required to interpret and apply a statute in a particular case their interpretation of the meaning of the words and phrases in the Act becomes part of the law and the interpretation of the statute may be followed as a precedent in later cases. Where the courts interpret the legislation and make decisions that were not intended by Parliament, the response is often for Parliament to amend the legislation to prevent courts from arriving at similar decisions again (see Fisher v Bell [1961] 1 QB 394 in [1.480]).

STATUTORY INTERPRETATION [1.460] The question that arises from the relationship between the judges and statute law is: how do the courts interpret legislation? When we examined the procedure for making statute laws we noted that they are written in English and they are read in Parliament six times. How could there be a problem understanding the meaning of the words and phrases in the Acts? The drafters of parliamentary legislation are not always perfect. Parliament does not always foresee all the consequences of a statute, or the words used may be unclear or ambiguous or change in meaning over the years. Statutes are passed for various purposes, for different groups of people, and often do not clearly specify either the purpose or the people targeted. It is the function of the judges in the courts to give sense and meaning to uncertainties in legislation.

Approaches to interpretation [1.470] At common law there are differing approaches to the interpretation of statutes. Most of the rules about interpreting statutes come from the judges’ own approaches and not from Parliament. Judges are not bound to use any one of the approaches that have enjoyed popularity at different times in legal history. Judges have tried to unravel the intent of Parliament but their approach has often reflected their own judicial philosophies. There are some basic principles that a court will remember when interpreting a statute: • the Act is to be read as a whole; • words are presumed to have consistent meanings throughout the whole of the Act; and • technical words should be given their technical meaning. Many statutes are clearly expressed and the wording is clear and unambiguous. Where this is the case the words are to be read as they appear. It is not the role of the courts to redefine the words because they do not like the legislation or because they think it to be unjust or unreasonable. Where the words are 30 [1.460]

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ambiguous, a judge does not simply sit down and apply one approach after another until a result is obtained that meets the approval of that particular judge. On the contrary, in the past where there was some doubt as to the meaning of words, some judges would approach the interpretation of the words from one direction, some from another direction. Parliament, however, has now spoken: if there is an ambiguity, the courts should apply the purpose approach. The differing approaches are: • the literal rule; • the golden rule; and • the purpose approach.

Literal rule [1.480] In interpreting words in Acts, courts had a tendency to declare that their only role was to give a literal effect to the words used by Parliament. This resulted in a technique called the literal approach or literal rule. Judges consulted dictionaries to assist them in interpreting a word if there was no definition in the Act itself. This meant that a court would give the words of a statute their ordinary meaning even though this might produce an absurd, unjust, inconsistent or meaningless result. In Fisher v Bell [1961] 1 QB 394, a shopkeeper was arrested for displaying a flick knife in his shop window with a price tag behind it. At that time a statute, the Restriction of Offensive Weapons Act 1959, prohibited the sale, offering for sale, lending or giving away of flick knives. In court the shopkeeper argued that he had not committed any offence as he had not sold or even offered for sale the flick knife but merely displayed it in the window. The court noted that there was no definition of “offer for sale” in the Act and as such the words were to be construed according to the meaning under the common law of contracts, ie the shopkeeper was merely making an invitation to treat (inviting offer to buy) and was not making a firm offer to sell. The court adopted a literal approach and reluctantly agreed that there was no breach of the Act. It was clear to the court that the Act intended to prohibit knives from being freely displayed for sale but the words used in the Act did not cover that activity. No one was in any doubt about what the law intended to say but the court was only prepared to interpret what it actually (literally) said. The court recognised that its role was not to fill in the gaps that a statute had not written. After this decision, Parliament amended the legislation to avoid this happening again.

Golden rule [1.490] A more commonsense approach to statutory interpretation was the golden rule where a literal interpretation of the words of a statute would lead to an absurdity or inconsistency with the rest of the statute, the words would [1.490] 31

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be given a meaning that would avoid the absurdity or inconsistency. So, in the example of the flick knife case above, the courts would, perhaps, give an extended meaning to the words in the statute to include the displaying of knives or offering them for sale. In this way, the shopkeeper could have been found guilty.

Purpose approach [1.500] The purpose approach requires an interpretation of the words of a statute in the way intended by Parliament. This approach is itself a development of the mischief rule, which seeks to discover the mischief that the statute was intended to rectify. This allows the proper meaning of the words used to be found. The classic statement of this rule was given in Heydon’s Case (1584) where the court stated that to obtain a sure and true interpretation of statutes in general, the four matters to consider are: • the law before the statute was made; • the mischief not covered before the statute; • Parliament’s remedy to the mischief; and • the true purpose of the remedy supplied by the Act. Re-examining Fisher v Bell [1961] 1 QB 394, the purpose of the English Act was to prevent the distribution of flick knives and this mischief would be remedied by stopping knives from being displayed in shop windows. Applying this approach the court would most likely interpret the meaning of the word “sale” to include offers to sell or the display of knives in shops. On this approach the shopkeeper would probably be found guilty.

Extrinsic materials [1.510] A major difficulty at common law with the purpose rule was how to discover the purpose of Parliament. In general, courts could only consider intrinsic materials (materials in the Act itself) in interpreting a statute and not extrinsic materials (those materials/information outside the Act). Among extrinsic materials are the various materials used in the law-making process. Often the new legislation aims to implement a report of a Law Reform Commission or a Committee of Inquiry. Also, the minister having responsibility for the legislation often explains the legislation to Parliament in reading speeches. Furthermore, the legislation may have undergone debate in Parliament and such debates are permanently recorded in the parliamentary Hansards.

Acts Interpretation Act 1901 (Cth) [1.520] The Commonwealth Parliament passed the Acts Interpretation Act in 1901 giving general guidance to the meaning of words and phrases found in Commonwealth statutes. In 1981 the Act was amended with the introduction 32 [1.500]

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of s 15AA. This provided that courts must read federal Acts so as to give effect to the purpose and policy of the legislation rather than the literal meaning. Effectively, this section was a direction from the government instructing judges how to perform their statutory interpretation and confirmed that the purpose approach was the approved method of interpretation. Section 15AB of the Act specifically allowed courts to use any extrinsic materials to help them in interpreting legislation and gives a list of extrinsic materials that may be used: • everything set out in the text of the Act and accompanying documentation; • relevant reports of Royal Commissions, Law Reform Commissions and Parliamentary Committees of Inquiry; • any relevant reports of either house of Parliament; • any international treaty referred to in the Act; • any explanatory memorandum attached to the Bill; • the Second Reading Speech of the minister in charge of the Bill; • any document declared by the Act to be relevant; and • anything recorded in the official reports of proceedings of Parliament. Some important observations should be made: • the court is not limited to the list of extrinsic materials set out in s 15AB; • the use of extrinsic materials is to confirm the meaning of words as used in their ordinary sense, to resolve ambiguities, and to promote the purpose of the legislation; and • s 15AB(3) cautions the judges to use extrinsic materials with care. The materials should be used to protect the interests of consistency and to avoid unnecessary legal proceedings. An example of the use of extrinsic material was in the case of Re Warumungu Land Claim; Ex parte Attorney-General (NT) (1987) 18 FCR 163; 77 ALR 27. The Aboriginal Land Rights (Northern Territory) Act 1976 (Cth) allowed Aboriginal Land Councils to make claims over certain areas of land. Sections 11 and 12 of the Act excluded claims in respect of roads over which the public had a right of way. The Central Land Council made an application over certain land that contained a stock route. A stock route is a traditional route for persons droving cattle or herding sheep or other animals. The legislation did not mention stock routes. The Minister, in his second reading speech, referred only to the roads over which the public has a right of way and named the roads that he was referring to. The Full Federal Court held that it was appropriate to refer to the Minister’s speech to determine the correct interpretation of the Act. Based on what the Minister said in the speech the court concluded that the Act was only intended to apply to general roadway systems and not to stock routes. [1.520] 33

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The Interpretation Acts of the various States contain similar provisions to s 15AA of the Commonwealth legislation. Some examples of similar State laws are: • s 33 of the Interpretation Act 1987 (NSW); • s 18 of the Interpretation Act 1984 (WA); • s 35(a) of the Interpretation of Legislation Act 1984 (Vic); • s 14A of the Acts Interpretation Act 1954 (Qld).

Aids to interpretation [1.530] The courts, and parliamentary drafters, sometimes make use of other interpretative aids. There is no obligation on the courts to use these aids, and if they are used, they should be used with caution. The most common of these interpretative aids is the ejusdem generis rule. This legal phrase means “of the same kind”. Where general phrases are preceded or followed by specific words of the same kind, then the general phrase is to be read down (limited in meaning) to things of the same kind. Assume that an Act of Parliament prohibits the shooting of koalas, kangaroos, wombats, platypus and other animals. The words “and other animals” are general words and at first reading appear to prohibit the shooting of all animals. Read the wording again: “koalas, kangaroos, wombats and platypus” are specific words and if we can fit them into the same category, one family of words, ejusdem generis, we might be able to narrow the meaning of the phrase “other animals”. Do the words form part of the same group? Clearly they do; they are all uniquely Australian native animals. So the words “and other animals” would be interpreted as limited to any “other Australian native animals”. Therefore the shooting of rabbits or foxes would not be prohibited as they are not native Australian animals.

Statutes that should be read narrowly [1.540] Traditionally, the courts have favoured narrow or restricted interpretations of certain types of statutes. Again these are only presumptions and the courts will, where the words are plain, give full meaning to those words. Penal statutes. A penal statute is an Act that imposes a penalty. The penalty may be a fine or a gaol sentence. The traditional approach to the interpretation of a penal statute is that any ambiguity should be resolved in favour of the individual accused. Taxation Acts. Again the traditional view has been that Acts that impose an obligation to pay a tax should, if there is an ambiguity, be interpreted narrowly. Acts that alter the common law. The courts generally take the view that clear words are necessary in a statute to fundamentally alter the common law. In each of the three previously mentioned instances, penal statutes, taxation Acts and Acts that alter the common law, the traditional approach is only one 34 [1.530]

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of several. If the words of the statute are clear, or if the court is obliged to use the purpose approach, then a wider interpretation will be given. Remember too that Parliament has now directed that the courts should give preference to the purpose approach and this may lead to a wider interpretation than was formerly the case.

SEPARATION OF POWERS [1.550] Under the Commonwealth Constitution there are three arms of government: legislative, executive and judicial. The power to make, administer/ manage and enforce Commonwealth laws is divided between these three bodies. To a large degree they are separated and there is a principle that no one person or body should exercise more than one of these functions or powers at the same time. 1.

Legislative power is the power to make laws. In Australia, the legislative power vests in the respective Parliaments (State and federal) subject to their constitutions, and in those bodies or persons to whom those powers are delegated.

2.

Executive power is the power to administer the laws. In Australia, these powers primarily vest in the different Ministers of the Crown (government) and the various government agencies.

3.

Judicial power is the power to interpret and enforce laws and, in the Australian context, the power to declare a law unconstitutional. These powers vest only in the courts. At the Commonwealth level the judiciary includes the High Court of Australia and any Federal Courts. At a State/Territory level the judiciary comprises all State/Territory courts (and tribunals).

This principle is known as the doctrine of separation of powers. This concept is designed to prevent abuse of powers where a body or person could not only make the laws, but could also administer them, and finally, enforce them and punish offenders for breaking the laws. There must not be one body that is simultaneously judge, jury and executioner. This basically means that in theory at least • only Parliament can make the laws (legislate), ie exercise legislative power • only the executive can administer/manage the laws, ie exercise executive power • only the judiciary (courts) can interpret and enforce the laws, ie exercise judicial power In reality there is not always a clear distinction between Parliament and the executive, as ministers also make laws. [1.550] 35

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The High Court was recently involved with separation of powers in North Australia Aboriginal Justice Agency Ltd v NT [2015] HCA 41. The Police Administration Act (NT) was passed by the NT Parliament. Amongst other things it allowed the NT police to arrest anyone suspected of a crime and to detain them for up to 4 hours (or longer if intoxicated) and then either release them, bail them or bring them before a court. The plaintiff was arrested on 19 March 2015 and detained for almost 12 hours. He commenced legal proceedings directly before the High Court claiming that parts of the legislation should be declared invalid because it gave the NT executive (NT police) the power to punish offenders. The doctrine of separation of power only allowed courts to impose punishment and as a result the Act undermined the judiciary. The majority dismissed the argument and stated the Act did not grant powers to the NT police to punish and so did not detract from or interfere with the integrity of the NT courts. The Act only allowed for detention for such period as reasonably practicable to allow the police to decide on the options imposed by the legislation. If the offender was brought before a court it would impose any penalties. There was therefore no interference with judicial powers. In relation to the role of the courts/tribunals, the independence of the judiciary is extremely important and the courts must not only remain independent but must also be seen to be so. No courts are to be influenced in any way by any political party or social group; they must be impartial and at arm’s-length. The independence of the courts is a basic principle to ensure justice in our society. In a presentation on 2 November 1996 to the Australian National University, Canberra at a symposium on “Judicial Independence”, the Honourable Sir Gerard Brennan, Chief Justice of Australia made the following comments relating to separation of powers: “The reason why judicial independence is of such public importance is that a free society exists only so long as it is governed by the rule of law – the rule which binds the governors and the governed, administered impartially and treating equally all those who seek its remedies or against whom its remedies are sought. However vaguely it may be perceived, however unarticulated may be the thought, there is an aspiration in the hearts of all men and women for the rule of law. That aspiration depends for its fulfilment on the competent and impartial application of the law by judges. In order to discharge that responsibility, it is essential that judges be, and be seen to be, independent. We have become accustomed to the notion that judicial independence includes independence from the dictates of the Executive Government” “... modern decisions are so varied and important that independence must be predicated of any influence that might tend, or be thought reasonably to tend, to a want of impartiality in decision-making. Independence of the Executive Government is central to the notion but it is no longer the only independence that is relevant.”

It is interesting to note that the principles of separation of powers are not mentioned directly in State Constitutions but are nevertheless recognised and followed at State level as an integral part of the State legal systems. 36 [1.550]

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International law and conformity with treaties [1.560] International law is a system of rules and principles affecting the relationship between sovereign states and between each state and any international organisations, eg the United Nations. A “state” is a recognised country or nation. Under the rules of international law all participating states are required to observe those law. Sources of international law include: • general principles of law, eg equity and estoppel; • international customs, eg human rights; • judicial decisions – the court which was established to deal with disputes with international law is the International Court of Justice (ICJ). Its decisions are binding only on the parties in the dispute. The ICJ identifies and decides the rules of international laws based on treaties, general legal principles and decisions from other courts and tribunals; • international treaties and conventions – a treaty is a written legal document (agreement) between states and regulated by international legal principles. Conventions are multilateral agreements, eg Hague Convention or Geneva Convention. Treaties or conventions may be bilateral (only between 2 states) or multilateral (between a large number of states). The process for making a treaty generally requires the following steps 1.

Adoption: finalise contents and how it is to be accepted.

2.

Signature: usually is an indication of intention to become a party to the treaty.

3.

Ratification: confirmation of signing treaty and is a formal act verifying consent that treaty will be binding.

The legal foundation for the ability of Australia to make treaties with other countries is located in the Commonwealth Constitution. Although there is no specific power to make a treaty in the Constitution, the High Court in R v Burgess [1936] 55 CLR 608 interpreted section 61 of the s 61 of the Constitution as containing power to make treaties. It also stated that once a treaty was made s 51(xxix) granted Parliament power to make domestic laws to enable the treaty to be fulfilled. In Australia, the Commonwealth Constitution requires the GovernorGeneral (acting with the advice of the executive Council) to perform the ratification. In practice the decision is generally taken by Cabinet or the relevant Ministers (including the Minister for Foreign Affairs and AttorneyGeneral). This means that the Executive has the power to conclude treaties and is not obliged to liaise with any other body to exercise its powers. No formal [1.560] 37

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consultation with or endorsement by any Parliament or other body is required. In practice, however, most proposed treaties are tabled in Parliament twice a year for discussion. In Minister for Immigration v Ah Hin Teoh (1995) 183 CLR 273 at 287, Mason CJ Deane and Toohey JJ said the act of ratification was a positive statement by the Executive government and it supported the rights of the public to expect the government to act according to the treaty. (The government disagreed with this view.)

CHANGING THE CONSTITUTION [1.570] There is now only one way in which the Constitution can be changed: by referendum, a vote of the Australian people. The Commonwealth Parliament must first vote to put the proposed change to a referendum in which all Australian citizens entitled to vote at a general election can participate. The proposed change must be approved by a majority of the voters with a majority in each State. This means that there must be an overall Yes vote nationwide and a Yes majority in at least four States. These stringent requirements have had the result that there have been few successful referendums since Federation. It is arguable that constitutional change can also take place informally, when the High Court changes its interpretative approach to the Constitution. For example, by adopting a more expansive view of the external affairs power, the High Court has increased the powers of the Commonwealth in relation to the States. Following the recommendations of a specially appointed Constitutional Convention in 1998, the Australian Parliament passed legislation for the holding of a referendum in November 1999. The questions asked at the referendum were: • whether a new Preamble to the Constitution should be adopted; and • whether Australia should become a Republic with a head of state nominated by the Australian Parliament. The referendum was defeated.

CLASSIFICATION OF LAW: PUBLIC AND PRIVATE [1.580] Legal writers have different ways of classifying law.We shall use two different classifications: public and private and civil and criminal. Public law contains those areas in which the public has a determining interest. Private law contains those areas of law where private rights and obligations are disputed. Civil law contains similar areas to private law because it involves laws that affect the relations between individuals, whereas criminal law involves some offence against society. 38 [1.570]

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Figure 1.5: A classification of law

Public law [1.590] Public law includes the following areas: • administrative law; • constitutional law; • criminal law; • industrial law; and • revenue law.

Administrative law [1.600] We have seen that Parliament makes laws and the executive, the government, carries these laws out. The government administers the laws that Parliament makes. We have also seen how Parliament sometimes delegates its law-making powers to other persons or bodies. Society has an interest in seeing that laws are administered properly and that delegated legislators do not exceed the powers delegated to them. This need is most commonly filled by the power of the courts to review the actions of those who exercise delegated powers. Parliament has also created special tribunals, such as the Administrative Appeals Tribunal, to review and correct administrative actions.

Constitutional law [1.610] Constitutional law involves the study and practice of the laws and procedures of the constitutions of countries and States. In Australia, as you [1.610] 39

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have seen, there is a written Constitution. Constitutional law in Australia is about the study of this Constitution and the constitutions of the States and how they operate. Constitutional law, however, involves much more than a study of written constitutions. There are also the unwritten conventions of the Constitution and the Acts that govern parliamentary representation.

Criminal law [1.620] The essence of a crime is that it is a wrong against the community even though the criminal action may cause harm to only one person. The offence may be a wrong against the morality of the community, or it may threaten the peace and order of the community, or it may conflict with the established policy of the governing body of that community. As an offence against the community, it is logical that proceedings against the offender should be begun in the name of the community (the Crown). The burden of proof in criminal matters is beyond a reasonable doubt. The normal penalty for a breach of the criminal law is a prison sentence or a fine. A fine is a monetary penalty, collected for the community.

Industrial law [1.630] Industrial law has a public and a private component. The contract of employment that regulates the legal relationship between employer and employee falls within the category of private law. Today, however, many employees are members of industrial unions and these employees do not negotiate their terms of employment individually. Usually industrial unions, representing the employees, and employers’ organisations, representing employers, fix these wages by negotiation. The payment of wages, and industrial conditions generally, can affect the nation’s economy. Consequently, the government, representing the community, has a vital interest in the employment of workers. Often the government will intervene where a change in working conditions is sought or resisted. This brings this area of law within the category of public law. Another public aspect of working conditions is the frequency of industrial accidents and work-related injuries. The community has an interest in the general welfare and safety of its members. Also, some employees may suffer an injury at work and be unable to continue in employment, whether temporarily or permanently. These employees might, without proper compensation schemes, become a burden on the community’s social welfare system.

Revenue law [1.640] Governments spend large sums of money for the purpose of governing. The administration of justice, social services, education, health and defence are but a few of these areas of expenditure. They raise this money by taxation of one kind or another. This taxation may consist of income taxation, customs duties, excise duties, stamp duties or taxation on the ownership of land. 40 [1.620]

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It is obvious that the average citizen does not wish to pay any more tax than legally necessary. Conversely, governments have a vital interest in ensuring that citizens do not avoid their obligation to pay taxes. As a result, taxation laws tend to be complex and lengthy. Taxation law is an ever-increasing area of legal practice. Although individual cases might properly come within the cloak of private law, taxation law falls properly under the category of public law.

Private law [1.650] The main areas of private law are: • contract law; • commercial law; • torts; • negotiable instruments; • property; • succession; and • business entities.

Contract law [1.660] The law recognises that certain agreements made between people should be legally binding. These legally-binding agreements are called contracts and they occupy an important part of our private law and your legal studies. An introduction to contract law is in Chapter 8 (Miles) and contract law is covered in detail in Chapters 9-15 (Miles) and Chapters 22 (Miles) and 23 (Miles).

Commercial law [1.670] Commercial law could be considered a category of law in itself, in that it contains all aspects of law that relate to business and commercial dealings. Classifying commercial law as a distinct category would include contracts, negotiable instruments and many of the other areas of law that you will study separately, such as consumer law.

Torts [1.680] The law of torts regulates the liability of someone who commits a civil wrong (other than a breach of contract) against another. The law of torts arose from criminal law and some torts such as trespass and fraudulent misrepresentation are also criminal offences. The law of torts is discussed in detail in Topic 6 dealing with negligence and Chapter 4 (Miles) dealing with defamation and privacy. [1.680] 41

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Negotiable instruments [1.690] A negotiable instrument is an instrument such as a cheque or a bill of exchange that is transferable by negotiation. It is a complex area of the law and is discussed in detail in Chapter 7 (Miles).

Property law [1.700] There are rules that govern the ownership and disposal of things, which we call property. Property consists of real property (land and the things that are attached to land) and personal property (all other property). Property law is covered in Chapter 16 (Miles).

Succession [1.710] Most people realise that they will one day die and thus like to make arrangements about the final disposition of their assets. They can do this by making a will, a formal direction as to what they want to happen to their assets after their death. In a will, it is customary to appoint an executor, a person who will carry out the directions of the testator, the person making the will. Legislation in each jurisdiction generally specifies what is to happen to a person’s property where there is no will. In these cases, the legislation generally sets out an order of priorities of the dead person’s spouse and relatives and other beneficiaries.

Business entities [1.720] Various types of business organisations exist in trade and commerce. A person may choose the form of business organisation in which to operate their business, including sole trader, partnership, company or trust. These are discussed in more detail in Chapter 5 (Miles).

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CLASSIFICATION OF LAW: CIVIL AND CRIMINAL [1.730] Figure 1.6: Civil and criminal law

Civil law [1.740] Civil law is concerned with the rights and obligations of individuals which can be legally enforced in a private capacity. Where a civil law is broken, eg a breach of contract, legal action is brought by an individual against another for some legal remedy, eg damages. As indicated by Figure 1.6, most of these areas of civil law are the same as private law. In a civil matter the party bringing legal action is the plaintiff and the party being sued is referred to as the defendant, eg Smith (the plaintiff) v Jones (the defendant). The civil law requires plaintiffs to prove their case and this is called the burden of proof. The amount of proof required by the law is called the standard of proof and in civil cases the standard of proof is assessed on the balance of probabilities. If a losing party is not satisfied with the court’s decision, the party may be able to appeal to a higher court. In doing so the party making the appeal is referred to as the appellant and the party which is appealed against is called the respondent, eg Jones (the appellant) v Smith (the respondent). In civil cases the law imposes civil remedies such as damages, specific performance, injunction or restitution of contract. In our study of commercial law we shall be mainly concerned with civil laws; the cases we examine will be about one person or business bringing legal action against another for a civil wrong.

[1.740] 43

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Criminal law [1.750] Criminal law contains a public element. Certainly criminal law is a branch of public law as explained earlier. Criminal laws are concerned with protection of society against specified antisocial behaviour. In criminal cases the prosecution (Crown) commences legal action against the offender on behalf of the public (society) for what the law considers is a crime that should be punished. As in civil law, since the Crown is commencing legal action it has the burden of proof. Criminal penalties are more serious than civil remedies and therefore, the law requires a higher standard of proof. In criminal cases, the standard of proof must be beyond reasonable doubt. When guilt has been established the court will impose some criminal sanction by way of a fine or gaol sentence or whatever punishment the law has provided.

Revision questions 1.

What is meant by the term “terra nullius” and how has the High Court’s decision in Mabo v Queensland (1992) 175 CLR 1 changed this?

2.

Distinguish between judge-made law and statute law.

3.

Under the Commonwealth Constitution there are three types of law-making powers. Describe these three powers and give an example of each.

4.

What were two important legal and political results of the Commonwealth of Australia Constitution Act 1900? How does s 109 of the Commonwealth Constitution overcome conflicts between valid Commonwealth and valid State statute laws?

5.

44 [1.750]

TOPIC 2 Contracts: Formation and Contents Offer and acceptance ........................................................................ Intention to create legal relations ........................................................ Consideration and estoppel................................................................ Contractual capacity ......................................................................... Contracts and interpretation of the contract .......................................... The operation of the contract .............................................................

[2.10] [2.220] [2.320] [2.420] [2.550] [2.720]

Extract from Davenport S and Parker D, Business and Law in Australia (Lawbook Co., 2015), Chapters 3–6, 9 and 10.

Terminology You will encounter the following terminology in this Topic. • Acceptance: assent to what has actually been offered. • Assignee: is the person to whom an assignment is made. • Assignment: in contract law means the transfer by a party to a contract of their rights and liabilities under that agreement to another party. • Assignor: is the person who assigns or transfers to another. • Auction: an arrangement whereby potential buyers are invited to make a bid (offer) which may or may not be accepted. • Chose in action: is a legal right as opposed to a right to a physical object and may only be enforced by the bringing of a legal action. It may take the form of a legal chose in action, which is a right of action that can be enforced in a court of law, or an equitable chose in action, which is a right of action that can only be enforced in a court of equity. • Collateral contract: a preliminary contract on which the main contract is based. • Condition: a term of the contract that is of basic importance, the breach of which gives rise to a right by the innocent party to either treat the contract as at an end and/or to sue for damages. • Consideration: the giving of something of value in exchange for a promise. This may comprise “… some right, interest, profit or benefit accruing to one party or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other” (Currie v Misa (1875) LR 10 Ex 153). • Corporation: an artificial body created by law (the Corporations Act 2001 (Cth)). A corporation is considered a legal person, as distinct from a “natural” person. • Counter-offer: an offer made in response to an offer (and therefore implicitly rejecting that offer). 45

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• Deed: an instrument (a document) which derives its validity from its form (ie, it is in writing, sometimes the format is prescribed by law, it is signed, sealed and delivered, it passes an interest, right or property to another and it does not require consideration). • Electronic communications: using the internet to make a contract requires communication of the acceptance. • Estoppel: a principle of law which stops a person from denying the truth of some statement they formerly made or of some action they took. • Ex gratia: out of grace, given without obligation to do so. • Exemption clause (also known as an exclusion or exception clause): a term of a contract which attempts to limit, or exclude, the liability of the party inserting it. • Forbearance: to give up something, to give up a right or opportunity, a promise not to do something. • Future (or executory) consideration: arises when the parties exchange promises, the consideration to be performed in the future. • Invitation to treat: a statement by a potential offeree indicating a willingness to consider offers. Put another way, a statement inviting offers. • Letter of comfort: a letter usually written by a parent company in general terms to a lender about a loan to a subsidiary of the parent company acknowledging the proposed loan (ie, providing “comfort” to the lender), but not legally enforceable. • Minor: (an infant or a child) a person of either sex who has not attained the age of 18 years. • Novation: refers to ending an existing contract and creating a new contract, usually on the same terms, but with one of the parties being different. • Offer: An invitation to a person or persons to deal on certain terms. An offer must set out the terms that will govern the relationship between the parties should the offer be accepted. • Offeree: the recipient of an offer. The offeree may accept or reject that offer (either outright, or by way of a counter-offer). • Offeror: a person who makes an offer. • Parol evidence: evidence given verbally or orally. • Past consideration: arises where the promise is made after the act. • Postal acceptance rule: if a contract is made through the postal service, the offeree’s posting a letter signifies acceptance. • Present (or executed) consideration: arises where an act is done in return for a promise. • Presumption: a belief or assumption based on reasonable evidence. In the case of intention, there is a rebuttable presumption. 46

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• Prima facie: of first appearance. • Privity of contract: means, as a general rule, that only the parties to a contract can acquire rights or incur liabilities under it. • Promisee: the person to whom a promise is made (ie, the recipient of the promise). • Promisor: the person making or giving the promise. • Promissory estoppel: occurs when representations or promises made by one party (the promisor) not to enforce contractual rights are acted on by the other party (the promisee) in such a way that if the promisor was allowed to go back on the promise the promisee would suffer some detriment. • Property: that which is capable of ownership and is divided into two categories: real property (land) and personal property (eg, goods). • Puff: statements not meant to be true, but to attract attention. • Ratification/ratify: affirmation of an agreement. Confirmation that there is a valid agreement in place. A person may ratify an agreement expressly or by conduct. • Reject: refuse to accept an offer. • Representations: in contract law, statements made by the parties in the course of negotiating a contract which are intended to induce the ultimate agreement but not intended to form part of the contract as terms. • Repudiation/repudiate: an indication by a party to a contract that he or she is unwilling or unable to perform his or her obligations under the agreement. A contract may be repudiated (disclaimed) by express words or the repudiation may be implied from the conduct of the party (unless legislation provides otherwise). • Rescission/rescind: putting an end to a contract in a way that treats it as if it never existed. An agreement can only be rescinded at common law where the parties can be returned to their pre-contractual position. Equity allows rescission on wider grounds. • Revocation: to revoke or withdraw an offer. • Simple contracts: contracts not made under seal (ie, they require intention, agreement and consideration). • Tender: an invitation, such as an advertisement, for offers which may or may not be accepted. • Term: a contract, is a clause or provision which is promissory in nature and which is intended to form part of the agreement. It may be further classified as a condition, warranty or intermediate term, depending on the intention of the parties. • Tort: a civil wrong other than a claim for breach of contract and for which the remedy is generally damages. 47

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• Unconscionable: against good conscience, so unfair that a court will not enforce an agreement. • Void: a contract that is “void” is one on which neither party can sue or be sued. • Void ab initio: a contract that is void from the beginning (ie, from the date at which the agreement commenced). A contract that is voidable may only be rendered void ab initio if the agreement may be rescinded. • Voidable: a contract that may be avoided (set aside) either at the will of a party (by repudiating or rescinding the agreement), or by a court order. A voidable contract is legally valid (effective) unless and until set aside. Therefore either party can enforce the agreement unless and until it is avoided. • Warranty: a term of the contract which is subsidiary (of lesser importance) to the main purpose of the contract and which confers on the innocent party only a right to sue for damages.

OFFER AND ACCEPTANCE Principles [2.10] Agreement is a necessary first step or element of every contract and arises when one party makes an offer which is capable of acceptance. An offer is a promise to do or to refrain from doing something; it is a firm proposal, the acceptance of which forms a binding agreement. An offer is serious and more than just an exchange of information; it is a communication capable of being accepted to form a bargain (enforceable agreement). Acceptance is a definite and unqualified assent to the exact terms of the offer. Agreement may be reached: • expressly, from an oral (spoken) exchange of statements, or in writing (eg, where one party signs a “standard form” contract, such as a loan contract or an insurance contract, given to her or him by the other party to the contract); • impliedly or in an inferred manner (eg, by conduct of the parties); or • by an extended negotiation process where various drafts of the final contract are exchanged between the parties until they are both satisfied with the wording.

The rules of “offer and acceptance” [2.20] The rules as to offer and acceptance are set out in Tables 2.1 and 2.2 respectively. The policy behind these rules is to ensure that parties are not legally bound to an agreement unless there is a consensus — a “meeting of minds” — between them in respect of the agreement. A court must be satisfied that the offeree freely knew, and understood, what the offeror proposed before 48 [2.10]

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he or she accepted the offer; and that the offeror was aware that the offeree had accepted that offer. A final agreement requires actual offer and acceptance and not just an agreement to create a contract and finalise matters: Forrest v Australian Securities and Investments Commission [2012] HCA 39. On this logic the reason for the various rules as to offer and acceptance becomes clear. For instance: • there is no consensus between the parties unless the offer (including all terms) was communicated to the offeree; and • there is no “meeting of the minds” between the parties unless acceptance was actually communicated to the offeror; and • there is no agreement between the parties unless the person(s) who “accepted” the offer was the person(s) to whom the offer was addressed; and • the party accepting must have agreed precisely to the terms of the offer and not introduce any terms in their acceptance; and • there can be no agreement if the parties did not freely enter the bargain, or were unable to comprehend what they were agreeing to.

Rules as to offer Offers distinguished from invitations to treat [2.30] It is important to distinguish between an offer, which will give rise to binding obligations upon acceptance, and an invitation to treat, which is a willingness to consider offers. In the case of an offer there is an intention to be bound if there is an acceptance, whereas with an invitation to treat it is an offer only to begin negotiating, or for another to “make an offer”. An advertisement, poster or brochure would not normally be considered an offer, unless it was intended to be an offer and is so specific that it in fact can be accepted.

Offers to the world at large [2.40] An offer can be made to everyone in the world, and a party can accept that offer as long as they meet the specific “terms” of the offer, eg, present a coupon for a free hamburger at a registered outlet before a certain date. Some offers may exclude certain parties, eg, “this offer is only to full time students under the age of 18”. These are offers aimed at specific groups within society. An offer to the world at large is distinguished from mere invitations to treat because it uses serious language which is very specific, clearly designating it as an offer, and also detailing the means by which acceptance must take place, before an agreement is said to be finalised. Case study Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256

[2.45] A company advertised their medication (smoke balls) with a promise that if anyone became sick with influenza after using the smoke balls, the company would pay a reward of £100. Mrs Carlill purchased the smoke ball [2.45] 49

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and used it as directed. She became sick with influenza and claimed the reward. The company claimed that the advertisement was only an invitation to treat. The court, however, held that the language of the advertisement was so specific and detailed, clearly defining the means by which the offer could be accepted, that it was an offer to the world at large which Mrs Carlill had accepted. A valid contract had therefore been formed and she was contractually entitled to the sum of £100.

An offer to the world at large can be revoked before acceptance takes place, normally by advertising or some public announcement to the world at large.

Shop displays, catalogues and advertisements [2.50] Shop displays, catalogues and advertisements are all regarded as invitations to treat. When a customer picks up a product on display in a shop and takes it to the counter, he or she makes an offer to purchase the product at the price stated on the price tag or on the shelf, which the shop assistant may accept or reject on behalf of the store. If a price is incorrectly stated on a product, the shop assistant can refuse the customer’s offer. Case study Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401

[2.51] The defendant ran a self-serve chemist which included drugs on the shelves. The defendant was prosecuted for breaching a sale of drugs Act which required drugs to be sold only “… under the supervision of a registered pharmacist”. The court decided that the goods on the shelves, even with prices marked, were only an invitation to treat as the registered pharmacist could accept or reject the customer's offer. If the pharmacist accepted the money, and entered the price in the cash register, a contract then came into existence.

[2.55] A price specified in a catalogue also represents an invitation to treat. The catalogue is inviting customers to make an offer on the goods at the price specified in the catalogue and it is up to the store whether or not they want to accept. The reason is essentially one of commercial convenience for the store in case it runs out of goods. The practice of distributing circulars or brochures to prospective customers arose in Grainger & Sons v Gough [1896] AC 325 when a court decided that the distribution of a circular or brochure to the homes of potential customers, setting out details of goods available for sale and relevant prices, was not an offer to sell, but only an invitation to treat. This decision (as occurs quite frequently with contract law precedents) appears to be based as much on practical commercial considerations as upon entrenched legal principles. In other words, the motivation for the decision was to prevent commercial chaos which would have resulted if the court had decided that brochure or circular distribution constituted an offer. Sometimes 50 [2.50]

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courts apply a “lesser of two evils” approach when deciding cases. If faced with a “bad” outcome on the one hand and a “worse” result on the other hand, the court will invariably choose the bad outcome. If goods were deliberately incorrectly priced in a catalogue, or on a shelf, in order to induce customers into a store, this would amount to a breach of the Competition and Consumer Act 2010 (Cth) for misleading and deceptive conduct (s 18), false statements in connection with the possible supply of goods (s 19), bait advertising (s 32) or a breach of equivalent State or Territory fair trading Acts. (This area of the law is studied in detail in Chapter 17 (Davenport).) The display of goods in windows is similarly not an offer but an invitation to treat. In Fisher v Bell [1961] 1 QB 394, a second-hand dealer who displayed a prohibited flick-knife in a shop window was charged with offering for sale an offensive weapon. The court held that this display of goods was not an offer but an invitation to treat. Note that automatic vending machines, eg, coffee machines or ticket machines at car parks, are not an invitation to treat, but actually make an offer, which is accepted when money is inserted or the ticket is taken; the contract is complete: Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163.

Auction sales [2.60] Calling for bids at an auction where there is a reserve is regarded as an invitation to treat. Bids are treated as offers which the auctioneer, who is the agent for the seller at this point, may choose to accept (by bringing down the hammer, at which point the auctioneer then becomes the agent for the buyer) or reject (by “handing in” the property). Note that for certain contracts there is still a requirement that the agreement be put in writing to be enforceable. Legislation may also apply, eg, the Goods Acts will hold that property purchased through an auction will still be valid, even though there is a defective title to the goods, or where the auctioneer did not have authority to conduct the auction. The auction itself must be conducted appropriately and participants are contractually bound to follow the rules of auctions.

Tenders [2.70] An advertisement calling for tenders is generally regarded as an invitation to treat unless there is an express undertaking that the lowest tender will be accepted, or the body advertising the contract states their exact needs in the advertisement. Any tenders received following the advertisement amount to offers that may be accepted or rejected after closer scrutiny. A tenderer is required to comply with the terms of the tender, eg, an offer must be in writing and received by a certain time to be a valid offer. The party calling for tenders is also under an obligation to conduct the tender process properly, eg, to actually read all submitted tenders. In the commercial world there are a [2.70] 51

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number of acronyms used to describe a tender, eg, RFT (request for tender), RFP (request for proposal) or EOI (expression of interest), but all are essentially offers through the tender process.

Communication of the offer and terms [2.80] The offer must be communicated to be effective. If the offeree is not aware of the existence of the offer, and the contract is based on knowledge of the facts by both parties, there can be no acceptance and, therefore, no agreement. All the terms that make up the offer must be brought to the offeree’s notice and the offeree must follow them exactly.

Cross-offers [2.90] Cross-offers occur when the parties each make an offer to each other, so there is no actual acceptance: Tinn v Hoffman (1873) 29 LT 271. This issue may arise when the parties each have their own standard form contract and are attempting to have the other side sign their terms; this is sometimes called the “battle of the forms” and it can be questionable as to whose form is the final actual agreement. The courts have developed some rules to determine which is the final contract, ie, the final agreement is the last one sent and received, or the most important document takes precedence — a formally drawn up agreement sent by one party is more likely to be the basis of the agreement than the sending of an invoice. A court might even examine all surrounding events and exchanges between the parties and make an assessment of the terms of the agreement from their various interactions and communications.

Termination of the offer [2.100] Once an offer is terminated, and this must be done before acceptance (note that a condition subsequent is an exception to this rule, see Topic 3), the offer can only be revived by the offeror. An offer may be terminated by: • revocation (withdrawal). Revocation by the offeror can occur at any time before acceptance, even if the offeror has said that the offer will remain open for a certain time, but note, to be effective the revocation must be communicated to the offeree before acceptance. Case study Byrne & Co v Leon Van Tienhoven & Co (1880) 5 CPD 344

[2.101] By letter on 1 October, Van Tienhoven made an offer of goods for sale from the United Kingdom to Byrne in New York. The letter was received on 11 October and accepted by telegram the same day, with a letter of confirmation posted on 15 October. In the meantime, Van Tienhoven posted a letter of revocation on 8 October, which reached Byrne on 20 October. It was held that the letter of withdrawal was ineffective as it was not received before the contract was completed on 11 October with the sending of the telegram.

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Note that an offer can be kept open by deed or supported by consideration (an option) until the agreed offer period has expired. Case study Goldsbrough, Mort & Co Ltd v Quinn (1910) 10 CLR 674

[2.102] Quinn agreed to keep an offer open for one week to the plaintiff company for the right to purchase certain land on the payment by them of 5 shillings' consideration. Before the week was up, and before the company had accepted, Quinn told the company he was withdrawing the offer. It was held that the company could enforce the option as it had been given for value and was not revocable except by lapse of time.

[2.105] • lapse of offer. The contract is held to be lapsed if not accepted within the time stated, or if no time is stated, within a reasonable time which will be judged by the nature of the offer, eg, an offer at a market may last only seconds whereas the failure to accept an offer for the sale of shares after five months was considered a lapse: Ramsgate Victoria Hotel Co Ltd v Montefiore (1866) LR 1 Exch 109. • death. An offer usually lapses with the death of either the offeror or the offeree, particularly where the offer was for personal services. If the offeree is aware of the death of the offeror, the offer lapses; however, if the offeree dies, it may be possible for the executor to accept the offer. Table 2.1: Rules as to offer What is an offer?

To whom can an offer be made? How is an offer made?

An offer is an invitation to a person to enter a contract on certain specified terms. It must be distinguished from an invitation to treat where there is no intention to be bound by the offer. An offer can be made to one or more persons.

By communication of the offer to the offeree (by words, writing or conduct). All terms of the offer must be brought to the offeree’s notice. Can an offer be “taken back”? An offer may be revoked at any time prior to acceptance by communication to the offeree. Exception: where the offeror contracted to keep the offer open (ie, an option supported by valuable consideration: see Chapter 5 (Davenport)). When will an offer expire? An offer will lapse (end): – if it is not accepted within the stated time (or within a reasonable time if no time was stated); – if there is a counter-offer; – if either party dies before acceptance; or – if there is loss of contractual capacity by either party.

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Acceptance Who can accept an offer? [2.110] Only the person to whom the offer is made can accept, although the offer can be made to a group of people or the world at large (in which case any person who was aware of the offer and complied with its terms could accept). Thus an offer made by A to B cannot be accepted by C. Acceptance must be made in reliance on the offer. Case study R v Clarke (1927) 40 CLR 227

[2.115] Clarke had been arrested and charged with murder. Clarke voluntarily gave information which led to the capture of the actual murderer, but did so in order to obtain his eventual release. A reward had been offered for such information. It was held, when Clarke tried to claim the reward, that his act was not done in reliance on the offer of a reward, therefore there was no acceptance and no contract.

How must an offer be accepted? [2.120] Acceptance must be clear, unambiguous and unequivocal so that the offeror knows there has been acceptance. Acceptance must be strictly in accordance with the terms of the offer (ie, unconditional, or it may amount to a counter-offer), and in the method prescribed by the offeror. If the offeror sets conditions on acceptance, then they must be met before there is an agreement; this is a conditional offer — acceptance is not complete until conditions are met, eg, to put the agreement in writing. Case study Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd (1957) 59 SR (NSW) 122

[2.125] A lease contained an option to renew subject to a number of terms, one being the payment of rent on time. During the currency of the lease, the rent was paid irregularly without the landlord's objection. When the tenant sought to renew the lease, the landlord refused. It was held that the punctual payment of the rent was a condition that had to be fulfilled before the tenant could exercise the option to renew.

Implied acceptance [2.130] Where the behaviour of both parties indicates that acceptance has taken place, then acceptance is implied:

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Case study Brogden v Metropolitan Railway Co [1887] 2 App Cas 666

[2.135] B had been for some time supplying coal to the railway company, and at a point in time sent a formal contract (which contained a number of new terms) to the railway in order to formalise their arrangement. The railway did not sign the document but filed it and continued to deal with the supplier according to the terms of the unsigned formal agreement. Later, when a dispute arose, the court found that there was an agreement, as the railway had implied its acceptance of the terms by continuing to deal with the offeror.

Conditional acceptance [2.140] Sometimes an offeree will accept an offer, but subject to certain conditions. This is called a “conditional acceptance”. Such situations can create dilemmas for a court, which might be called upon to decide whether a contract is formed when the conditional acceptance is given, or only when the condition referred to in the conditional acceptance is satisfied. This problem can arise when parties come to an apparent agreement, but one (or both) of the parties insists that the arrangement be, eg, “subject to preparation by my solicitors of a formal contract”. Case study Masters v Cameron (1954) 91 CLR 353

[2.141] The parties signed a memorandum drawn up by the vendor's agent which contained a clause stating that the agreement was subject to the preparation of a formal contract of sale acceptable to the vendor's solicitors. The purchaser, Masters, wanted to withdraw from the sale. It was held that the agreement was not in its final form as it could have been altered by Cameron's solicitors and so no contract existed. The offer was conditional and the condition was not met.

[2.142] Masters v Cameron (1954) 91 CLR 353 was important and the court found there could be three different situations: ie, that the parties have an agreement, and part of the agreement is to write it into a formal contract; or secondly there was a binding agreement but one which would begin to operate only when the formal contract was created; or thirdly the agreement would only come into effect if the agreement was formalised — which in the Masters case was never done. If no method of acceptance is prescribed, then acceptance must be by the custom of the trade or what is reasonable in the circumstances. However, if the mode of acceptance is prescribed then this must be complied with, eg, acceptance must be in writing and given by a certain date. If the party accepting uses a different method from that prescribed, they run the risk of an

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invalid acceptance, eg, where a communication does not arrive when sent by courier, when the post was prescribed as the method required. Case study Eliason v Henshaw 17 US (4 Wheat) 225 (1819)

[2.143] An offer was made which stipulated the acceptance should be by return wagon (the wagon returned without any communication). The offeree chose to post the acceptance, which was lost. A court found that the offeree had not accepted in the manner prescribed and the offeror was entitled to assume there had been no acceptance.

Case study Powell v Lee (1908) 99 LT 284

[2.145] P applied for the position of headmaster of a school and the school board passed a resolution appointing him. The resolution was not communicated to P but a member of the board privately told P of its decision. The resolution was subsequently rescinded and another person was appointed. It was held that P's offer had not been accepted as the resolution was never communicated officially by the board.

Acceptance must be communicated [2.150] As a general rule acceptance must be communicated by words, writing or conduct according to what the offeror has stated, or if the offeror has said nothing, then by what is a reasonable method in the circumstances. Case study Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153

[2.151] The council authorised Brambles to charge and keep a fee for the collection of waste. The council offered to increase the fee and by letter Brambles asked that a higher fee be set, although Brambles continued to charge the lower council fee. It was held that the letter from Brambles was a negotiating tactic and that charging the fee set by the council's offer was acceptance by conduct.

[2.152] Where no method of acceptance is stated, the offeree should choose a method of acceptance that is as expeditious as the method used by the offeror to communicate the offer, unless it is to take the form of an act. In that case, no communication of acceptance is necessary unless the offeror has requested it (eg, in Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256, acceptance was indicated by Carlill purchasing the smoke ball). However, acceptance will not occur through silence.

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Case study Felthouse v Bindley (1862) 142 ER 1037

[2.153] Felthouse wrote to Bindley offering to sell him his horse, stating a price and adding that if he didn't hear from him he would assume that he (Bindley) had accepted the offer. Bindley did not reply, and while his actions suggested he intended to accept, it was held that there was no contract because there had been no communication of his acceptance.

Acceptance must be within the time prescribed by the offeror, and if no time is specified, then within a reasonable time. What is a reasonable time depends on the circumstances in each case. Case study Ramsgate Victoria Hotel Co Ltd v Montefiore (1866) LR 1 Exch 109

[2.155] A wrote to the secretary of a company offering to buy its shares but the company took five months to reply, accepting the offer. It was held that the company had not accepted within a reasonable time.

Place of acceptance [2.160] A contract is concluded in the place where acceptance takes place, and the jurisdiction of the country where acceptance is concluded determines the law that will apply. If the parties are not meeting face to face, but using instantaneous communication, eg, telephone, telex, fax, radio, email or skype the contract is concluded at the time when, and the place where, acceptance of the offer is received by the offeror. The jurisdiction in which the acceptance takes place will apply its law of contract and hear any disputed matters. This might be important where the offeror and offeree are in different countries. Case study Mendelson-Zeller Co Inc v T & C Providores Pty Ltd [1981] 1 NSWLR 366

[2.165] Californian vendors offered to sell fruit to buyers in Sydney, the latter accepting the offer by telex. It was held that the contract was made in California when the telex was received. The contract would then be subject to Californian (American) law.

Counter-offers and requests for information [2.170] A counter-offer will revoke the original offer, and form a new offer directed to the original offeror: Hyde v Wrench (1840) 49 ER 132. If, however, a request is made for further information about the offer, rather than making another offer, then the offer is still alive and capable of acceptance. Sometimes this can be difficult to distinguish.

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Case study Stevenson Jaques & Co v McLean (1879-80) LR 5 QBD 346

[2.175] M made an offer to S which was to remain open for a set time. S responded with some questions about the mode of payment. M sold the goods to someone else without responding to S and S sued for breach of contract. The court determined that a request for information was not a counter-offer and awarded damages.

Revocation of acceptance [2.180] Revocation of acceptance can occur provided it is communicated to the offeror before the acceptance is received. Once acceptance takes place the agreement is binding.

Joint promises [2.190] A joint promise is an undertaking or promise made by more than one person who agree to be bound to the bargain individually and jointly. The parties need to indicate that they are entering a joint agreement, usually by signing a contract or note to this effect. Such agreements are therefore either a contract for joint liability or for joint and several liability. If joint and several, then each party can be sued individually, as well as jointly. The differences between a joint promise and an individual promise are: • that a party to a joint promise can demand that any legal action against them personally under the contract must be taken against all the joint promisors; • that a party suing the joint promisors under a “joint and several promise” can sue each individually or jointly; • that a successful case against one party to a contract, where they are jointly liable, stops actions against the remaining parties to the agreement; • that joint promisors in a joint and several contract are not discharged if there is a successful judgment against one promisor; • that a release from liability of one joint promisor under a joint contract is a release of all promisors; and • that release from liability of one promisor under a joint and several contract does not release the other promisors from their potential liability.

The postal acceptance rule (PAR) [2.200] The postal acceptance rule (PAR) is an exception to the general rule that acceptance is not effective until communicated to the offeror. This is an historical rule which was established because most communication was by mail, whereas today most communications are made electronically. The PAR states that acceptance occurs on posting (assuming the letter is correctly addressed), rather than on communication to the offeror — as long as the parties relied on the post as being the means of entering into a contract. 58 [2.175]

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The risk of non-receipt of the acceptance falls on the offeror, eg, where the letter is lost, because they had the option of specifying acceptance by any other means than the post but did not do so. Where the offeree claims they have a sent an acceptance, then a court will have to decide the truth on the balance of probabilities. Where an offer is made by post, unless the contrary is stated, acceptance can be made by post. Acceptance by post would be contemplated by the parties when an offer is made by post (unless acceptance by post is expressly excluded), or when the offeror indicates willingness to accept postal acceptances. In some instances the offeror will make acceptance by post conditional, eg, insurance companies normally state in their offer that a letter of acceptance must be received and date-stamped before it is considered valid or a receipt number must be attached. In many respects the postal acceptance rule is historical and larger enterprises are able to exclude the rule. Case study Elizabeth City Centre Pty Ltd v Corralyn Pty Ltd (1995) 63 SASR 235

[2.205] C Pty Ltd sent a letter by ordinary post to E Pty Ltd giving notice that it wished to renew its sublease. E Pty Ltd claimed it never received the letter and the sublease was not renewed. A clause in the sublease provided that a notice sent by registered or certified mail was deemed to have been served on E Pty Ltd on the third business day following its posting. It was held that the PAR was impliedly excluded by the clause. Thus the ordinary rules of offer applied and as E Pty Ltd never received notice of the offer, the option to renew lapsed.

The PAR applies to telegrams as well as letters, but not to instantaneous forms of communication such as telephone or facsimile. As the PAR is about acceptance, it does not apply to offers. However, when an offer is sent through the post, the offer is not made until the offeree has read the letter. A revocation of an offer made through the post must take place before the other party posts a letter of acceptance. If the offeree has sent their acceptance and then receives a revocation it is too late, the contract is complete. Table 2.2: Rules as to acceptance What is an acceptance? Who can accept an offer? How must an offer be accepted?

An acceptance is agreement to contract on the terms specified in the offer. An offer can only be accepted by the person(s) to whom it was made, and in reliance on the offer. An acceptance may be by words, writing or conduct. (Generally silence cannot constitute an acceptance.) Acceptance must be unconditional (or it may amount to a counter-offer). Acceptance must be in the method prescribed by the offeror or by equally expeditious means.

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When does acceptance occur?

Can an acceptance be “taken back”?

Acceptance must be within the prescribed time (or within a reasonable time if no time was prescribed). An offer is accepted where and when the acceptance is actually communicated to the offeree. Exceptions: Where acceptance is by the performance of an act at the request of the offeror (in which case acceptance is on the doing of the act). Where acceptance is by post, and the postal acceptance rule applies (in which case acceptance is deemed to have been effective on posting). The offeror has dispensed with the need for communication of acceptance. An acceptance may only be revoked before it is communicated to the offeror.

Electronic communications [2.210] With the increase of electronic enterprise (e-commerce) and contracting through electronic means, both the States and the Commonwealth have legislated rules regarding contracts made electronically, sometimes referred to as “instantaneous communications”. Laws regarding communications by electronic means, while based on common law principles, have been modified by Commonwealth and State law dealing with electronic transactions. Australia has generally uniform legislation throughout each jurisdiction, with States and Territories amending their legislation in concert with the Commonwealth which passed the Electronic Transactions Amendment Act 2011 (Cth). This legislation amends the existing Commonwealth legislation of the Electronic Transactions Act 1999 (Cth) by retrospectively clarifying some issues regarding electronic contracts. The Commonwealth is a signatory to the United Nations Convention on the Use of Electronic Communications in International Contracts under which Australia has agreed to implement the rules of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Electronic Commerce 1996. The States and Territories have now amended their legislation to ensure uniformity throughout Australia. The changes made by the Commonwealth include some changes to existing principles, and in particular a change to some of the default rules, or assumptions, that can be made regarding the making of electronic contracts. The Commonwealth Act and its amendments include: • That digital signatures will be accepted as approval of an agreement, similarly to an ordinary signing, allowing for means of certification of the digital signature (using cryptographic means or codes) if agreed upon by the parties: Electronic Transactions Act 1999 (Cth), s 10. • A default rule that a dispatch of an electronic communication occurs when it leaves an information system under the control of the originator of the communication, irrespective of delays in receiving the communication because of the receiver’s security structures: s 14(1)(a). 60 [2.210]

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• The default rule that the time of receipt is when the electronic communication becomes “capable of being retrieved” by the addressee at a designated electronic address or, if the communication is sent to another non-designated address, then the time of receipt is when the message is “capable of being received” and the addressee has become aware that the message has been sent to that address: s 14A. • That a proposal to form a contract, other than a proposal to a specific person, is to be considered an invitation to treat, unless there is something contrary to indicate that it is a firm offer: s 15B. The “invitor” is not bound by any proposal unless there is a clear indication that it was their intention to be bound by any acceptance. Therefore a click on the “I agree” button is really an offer being made rather than an acceptance. • Automatic message systems now can be used to form contracts, without the involvement of natural persons in the review of the contract: s 15C. • Parts of a contract can be withdrawn if there are mistakes made when an automatic message does not allow for the correction of an error in the agreement, and as long as the person notifies the other side as soon as possible before receiving any benefit or use under the contract: s 15D. To a large extent the legislation of the different States, Territories and the Commonwealth regarding electronic transactions does not dramatically change the operation of contract rules that exist already, but rather clarify some of the procedures used electronically in making and accepting an offer, and the means by which parties can show their proof of an agreement. The Electronic Transactions Act 1999 (Cth) clarifies a number of issues such as the place of the formation of the contract being the place where the offeror has received an acceptance at their “place of business” (s 14B), though there can be exceptions to this rule. Figure 2.1: Offer and acceptance

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INTENTION TO CREATE LEGAL RELATIONS Principles [2.220] For any agreement to be legally binding, the parties must have mutually intended that the agreement will be enforceable in a court of law. Therefore the intention to create legal relations is one of the four essential elements of a valid contract. Without an intention to create enforceability there is no contract between the parties to an agreement. The reason for the requirement of intentional legal enforceability is that it would be unworkable for every agreement to be contractually binding; and in certain situations, the parties do not make an agreement which is intended to be enforceable in a court of law if breached (eg, an arrangement to go out to dinner with a friend is not intended to create legal relations). The legal rules about intention to create legal relations are designed to ensure that the law of contract only applies to serious agreements between parties, agreements where the parties know they may be sued if they do not comply with what has been agreed. There are two legal presumptions concerning enforceability which have developed over time, although the decision of the High Court in Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 has suggested that determining whether the parties intend to create a legally enforceable agreement may be quite complex (and not just based on simple assumptions); the court needs to make an objective assessment of statements and actions by both parties, and the circumstances under which they occurred. The test applied by the courts to determine intention is objective and the question the courts consider is whether a reasonable person would have regarded, from the evidence, that the agreement was one intended by the parties to be binding. The basic rules are that parties to a commercial or business agreement are presumed to intend that the agreement will be enforceable in court, while agreements for social and domestic arrangements are presumed not to be enforceable in the courts.

Social or domestic agreements [2.230] Where the contract is of a social or domestic nature, the law generally assumes that the parties did not intend their agreement be legally binding. Where one party wishes to enforce the agreement at law, they must prove, on the balance of probabilities, that the parties did intend that their agreement be legally binding. Case study Keller v Holderman 11 Mich 248 (1863) [2.231] A person, as a joke, gave another a large cheque for a watch of little value. The recipient then tried to enforce the “contract”. The court, however, held that there was no contract in existence, since there was no intention to 62 [2.220]

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be legally bound by the transaction. Despite the fact that it was a commercial transaction, which triggers the presumption of intention, the presumption was rebutted by the fact that the transaction was purely for frolic and banter, done in jest for humour and was not enforceable as no legal relations were intended.

Case study Nyulasy v Rowan (1891) 17 VLR 663

[2.235] A man made an offer to sell shares at a certain price, an offer which was later taken up by the offeree. The offeror then claimed that the offer was just a joke and refused to sell the shares at that price. When the buyer sought to enforce the contract, the court held that there was a contract. At the time of the contract, the offeree had believed it to be a serious offer, as had others who were aware of the offer. The transaction was commercial in nature, the presumption (of intention) applies, which the offeror had failed to rebut, so the agreement was binding.

Spouses [2.240] In the case of agreements between spouses the courts will be prepared to find the necessary intention to create a contract existed if the surrounding circumstances suggest that the contract was intended to be legally binding (eg, where a promise has been made after the parties have separated or ended their marriage): Case study Meritt v Meritt [1970] 1 WLR 1211

[2.241] When a husband left his wife to live with another woman, the parties agreed that the husband would transfer the house, which was in their joint names, into the wife's sole ownership after the mortgage was discharged. After the discharge of the mortgage, the husband refused to transfer the house. It was held that the wife should succeed as the parties had separated and it was such a serious agreement that this demonstrated that legal relations must have been intended.

but consider: Case study Balfour v Balfour [1919] 2 KB 571 [2.242] The parties had been living together in London while he was on leave from his job in Ceylon. When he was due to return his wife became ill and could not travel; he promised that while they were apart he would pay her an allowance. On his return to Ceylon he wrote to his wife and suggested they [2.242] 63

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should remain apart and refused to continue his payment. The wife was ultimately unsuccessful in enforcing the agreement. A court held that the agreement was an ordinary domestic agreement and not intended to give rise to a legally binding contract.

[2.245] The law applying to agreements between partners in a marriage applies similarly to a de facto relationship unless it has ended, whereby such agreements will not be binding: Shortall v White [2007] NSWCA 372. Under the Family Law Act 1975 (Cth), Pt VIIIA (Financial agreements) a couple may make an enforceable pre-nuptial agreement (prior to marriage) which may be enforceable.

Other family arrangements [2.250] While family arrangements are generally not regarded as intending an enforceable legal agreement, if one party has changed their life significantly in reliance on the agreement or arrangement, and this has serious consequences, it may suggest that there is more than just a social or domestic agreement, but rather a binding agreement: Case study Wakeling v Ripley (1951) 51 SR (NSW) 183

[2.251] The defendant, an elderly and wealthy man, owned a house in Sydney. He urged the plaintiffs, his sister and her husband, to leave England and he promised them a home and virtually all his property on his death. On the basis of the promise the plaintiffs sold their home in England and the husband resigned his job and they moved to Sydney. After the plaintiffs had lived in Sydney for a year, they had an argument with the defendant and he sold the house they lived in and changed his will. It was held that the defendant was in breach of his agreement as there was ample evidence to infer that the parties did intend to enter into a binding and enforceable contract.

Case study Riches v Hogben [1986] 1 Qd R 315

[2.255] An 88-year-old widow persuaded her 64-year-old son and his family to migrate to Australia from the United Kingdom on the promise of buying him a house in his name in return for him looking after her for the rest of her life. The son and his family gave up their rent-free council house and sold their possessions at a loss. When they arrived in Australia, the widow bought the house in her own name but after seven days ordered them to leave following an argument. It was held that the agreement was intended to have legal effect and went beyond a mere family arrangement.

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Competitions and lotteries [2.260] While the consequences for the injured party in the majority of social and domestic arrangements are not considered to be serious enough to persuade the court that the agreement was always intended to be binding at the time, the same is not always true in the case of agreements or arrangements to participate in competitions and lotteries where the consequences are more significant (eg, winning Lotto): Case study Simpkins v Pays [1955] 1 WLR 975

[2.261] The defendant, her granddaughter and the plaintiff regularly entered a competition in a newspaper, with the entries always in the defendant's name but the costs were shared. When one of the entries won, the defendant refused to share the prize, claiming there was no intention to create legal obligations. It was held that the nature of the agreement between the parties was such that it must have been contemplated that it would be enforced in the event of them winning.

Case study Trevey v Grubb (1982) 44 ALR 20

[2.262] A four-member syndicate contributed 50 cents each for a $2 Tattslotto ticket, which won $218,000. The party who lodged the ticket claimed the prize, but the court held there was a contract, enforceable in law, and she was entitled to the proportion of the winnings to which she had contributed, which was 25%.

[2.265] Where there appear to be serious terms attached to a competition, then it becomes binding, eg, if a party requires security and verification, with the ability to reject an entrant, there is an enforceable contract: Hurley v McDonald’s Australia Ltd [2000] ATPR 41-741.

Voluntary and charity agreements [2.270] In the context of work carried out on a voluntary basis, or for charity, the courts have been reluctant to infer an intention to create legal relations: Case study Teen Ranch Pty Ltd v Brown (1995) 87 IR 308

[2.271] Brown was injured while working as a volunteer at a camp for teenagers. In a claim for workers' compensation, the issue arose as to whether there was a contract of employment in existence so that he could be said to be an employee. It was held that there was no indication that legal relations were contemplated by the parties and so no contract existed.

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Case study Dietrich v Dare (1980) 54 ALJR 388

[2.272] The respondent was to initially pay $2 an hour for the appellant's services in painting the respondent's house. If the appellant showed that he could do the task, an increase in the pay rate would be discussed. The appellant was injured when climbing a ladder to start the work. He claimed he was entitled to workers' compensation. It was held that as no intention to create legal relations could be inferred no contract of employment existed and he was therefore not entitled to workers' compensation.

But compare: Case study Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95

[2.275] The Archbishop of the Greek Orthodox Community in Adelaide claimed entitlements of annual leave and long service leave after his employment was terminated. It was held that while the appointment of a minister of religion is spiritual, an objective assessment of the state of affairs between the parties showed that there was an intention to create legal relations. The court refused to apply a simple assumption that an agreement with a religious organisation was not intended to be legally binding.

Commercial agreements [2.280] Where the contract is of a commercial or business nature, it is assumed that the parties did intend to create legal relations and so it is easier to establish that the parties did intend that their agreement would be legally binding: Case study Edwards v Skyways Ltd [1964] 1 WLR 349

[2.281] During an industrial dispute, an airline agreed with the Pilots Association to give redundant pilots “ex gratia payments”. When a pilot sued to recover his payment the company tried to avoid liability on the grounds no legal relations were intended. It was held that there was an enforceable contract as there was a clear indication that the agreement was intended to be legally enforceable.

There are two main ways by which it can be shown that legal relations are not intended in a commercial arrangement: • an express stipulation in the agreement that it was not intended to be enforceable in a court of law, sometimes referred to as an honourable agreement. Courts will enforce such honour-only clauses if this is what the parties actually intended:

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Case study Rose & Frank Co v JR Crompton & Bros Ltd [1925] AC 445

[2.282] A business agreement drawn up between an American and a British firm contained a clause which stated that the agreement was not entered into as a formal or legal agreement, or subject to legal jurisdiction in the law courts, but rather was an expression of intention only. A court held that the clause indicated the parties did not intend legal relations.

Case study Jones v Vernon Pools Ltd [1938] 2 All ER 626

[2.283] Jones alleged that he had sent a winning coupon to the defendant but it could not be found. When sued by the Jones, the defendant relied on a clause included in its coupons which stated that in entering the pools the parties agreed that no legal relationship was intended. It was held that, in view of the clause, the agreement was not intended to give rise to legal relations and so the plaintiff had no enforceable claim.

• the wording of the agreement itself: Case study Souter v Shyamba Pty Ltd (2002) 11 BPR 20269

[2.284] After several months of negotiation, the parties signed a document for the sale of a hotel. The document set out the price, the parties and details of the property. The vendor asked its solicitors to draft a formal contract. When another buyer made a better offer, the vendors argued they were not bound by the document. It was held that the document showed an intention to create a binding contract as it included all essential terms, was expressed in formal and legalistic language, was not subject to contract and represented the conclusion of negotiations between the parties.

Case study Le Mans Grand Prix Circuits Pty Ltd v Iliadis [1998] 4 VR 661

[2.285] Illiadis was injured at a go-kart track run by a company while attending a corporate promotion. The company sought to rely on an exemption clause in a form signed by the injured party, though the company itself did not sign the form. The injured party did not read the form, thinking it was a marketing brochure. It was held that the form did not create a contract given the circumstances in which the document was given as there was no indication when it was given to the visitor that he was signing a contract.

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Administrative arrangements [2.290] Where a government department or authority takes some action required of it by law or under some government scheme, this does not necessarily mean that an enforceable agreement exists between it and the other party. Such action will only give rise to contractual obligations if there was a clear intention that the agreement is to be enforceable in a court of law, otherwise it is an unenforceable administrative arrangement. Case study Administration of Territory of Papua and New Guinea v Leahy (1961) 105 CLR 6

[2.291] L had a cattle property and entered into an agreement with the Department of Agriculture that in return for L providing labour and gathering his cattle, the government would spray and eradicate a tick infestation on his cattle. The eradication program did not work because it was completed poorly by government workers and L claimed breach of contract. L was unable to enforce a contract and the court found the agreement to be one where there was no intention to create legal relations, but rather one of an administrative arrangement, a social or public service.

Case study Australian Woollen Mills Pty Ltd v The Commonwealth (1954) 92 CLR 424

[2.295] The Commonwealth government proposed to give a subsidy to Australian manufacturers of woollen products. There was an exchange of letters between a government department and the company, but later the subsidy was suspended. The company was ultimately unable to show that the agreement was intended to be legally binding; there was no legislation, nor proper appropriation process to pay the subsidy — it was an administrative arrangement.

Ambiguous language [2.300] If ambiguity (as to whether or not legal relations were intended) arises from the words used by the parties in their agreement, the courts can disregard the words used and ascertain the intention of the parties from the general circumstances surrounding the transaction. Case study Edwards v Skyways Ltd [1964] 1 WLR 349

[2.305] An airline offered a redundancy plan to its employed pilots in which it would pay the superannuation they would otherwise have been entitled to, with the proviso that they retired early. The airline's documentation showed a clause whereby the payment was “ex gratia” (“out of grace”), which normally means a voluntary payment without legal obligation. The pilot retired but the airline refused to make the payment and claimed that the document's “ex 68 [2.290]

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gratia” clause meant that there was never a commercial (enforceable) agreement. The court held that, despite the use of the words “ex gratia” in the agreement, the agreement was clearly commercial in nature and the airline had not done enough to rebut the presumption of intention. The court found that the agreement was legally binding, since all the elements of a contract were present. An assessment of the intentions of the parties showed they both intended to create a legally enforceable agreement, despite the words used, so that the pilot was entitled to be paid.

Letters of comfort [2.310] A letter of comfort is a statement of intention often given to a creditor by a third party as a substitute for a guarantee and is generally intended to be non-binding. For example, a letter of comfort may comprise a memorandum from one company (a holding company) to a creditor (for instance, a bank) undertaking that the company will maintain its shareholding in a particular subsidiary (the borrowing company) for the duration of the loan and thereby ensure that the subsidiary remains, at all times, in a financial position to meet its liabilities to the creditor. However, in most instances the party writing the letter does not intend that such an undertaking was intended to be legally binding. Much depends on the words used within the documentation and the circumstances under which the agreement is made. Case study Kleinwort Benson Ltd v Malaysia Mining Corporation Bhd [1988] 1 WLR 799

[2.311] A parent company which had a wholly owned subsidiary wrote to Kleinwort (a bank) which had loaned £10 million to the subsidiary and said: “It is our policy to ensure that the business of Malaysia Mining Corporation Metals Ltd is at all times in a position to meet its liability to you under the above arrangements.” An appeal court held that the letter of comfort was only a representation as to the defendant's policy, and not a promise as to its future conduct. There was a moral, but not a contractual obligation on the defendant to repay the loan.

Case study Commonwealth Bank of Australia Ltd v TLI Management Pty Ltd [1990] VR 510

[2.315] TLI Management's letter to the bank indicating its intention to complete takeover arrangements of a company “Hovercraft Ltd”, and to inject sufficient capital to defray a temporary loan facility within 30 days was held by the judge to be not promissory in nature, and therefore did not give rise to any contractual obligation to repay the funds, as there was no intention to create legal relations.

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In commercial practice within Australia there are various communications such as a “letter of intent”, sent during negotiations in order to clarify proceedings, but not intended to be a binding statement which is enforceable. Similarly, there are other types of agreement such as a “Memorandum of Understanding”, “Proposal for Dealing”, “Strategic Alliance” or “Preferred Dealer Proposal”. These are all different statements of intention and have no other meaning than what the parties intend, which is usually not an agreement that is to be legally binding so that it is enforceable in a court of law. Figure 2.2: Intention to create legal relations — overview

Figure 2.3: Intention to create legal relations — social or business contracts

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CONSIDERATION AND ESTOPPEL Principles [2.320] For a contract to be binding it must have consideration, which is basically giving something in exchange for an enforceable promise. More formally consideration is defined as an act, forbearance or a promise given in exchange for a promise from another party. If nothing of value is given in exchange for a promise under a simple contract, then the agreement is unenforceable because the consideration is said to be a mere gift (gratuitous). However, no consideration is required where the parties have contracted in a deed under seal, known as a formal contract. Consideration can take many forms; the usual is a promise to pay, but could also be a promise not to sue, or to give up some other right or course of action (forbearance). Forbearance to sue is valid consideration as long as the promisee had a reasonable and honest belief that they could have in fact sued.

Rules regarding consideration Consideration must be proved in a simple contract [2.330] Consideration must exist if a simple contract is to be enforceable: Case study Heaton v Richards (1881) 2 LR (NSW) 73

[2.335] The government agreed to print and publish a book for the plaintiff who was to pay all the costs. The government gained no advantage. When the government did not publish the book, the plaintiff sued. It was held that it was a gratuitous agreement (ie, done for free) on the part of the government and so no contract existed.

Consideration must move from the promisee, but not necessarily from the promisor [2.340] Consideration must move from the promisee to the promisor, which means the person seeking to enforce the promise (eg, the promisor’s undertaking to supply goods) must show they gave consideration, perhaps in the form of a deposit, or a promise to pay the price of goods supplied. The promisee must be able to show something of value has been given, through an act they have performed, or perhaps acting to their own detriment or even supplying something of value to a third party at the request of the promisor. Consideration does not need to flow directly back to the promisor, it can go to a relative or someone identified by the promisor. This is related to the notion of “privity of contract”, which means that only a person who is a party to a contract (“privy” to the contract) can sue or be sued in contract.

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Case study Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847

[2.345] A manufacturer supplied a wholesaler with tyres, but as part of the agreement the wholesaler was to ensure the tyres were sold at the manufacturer's set price list. The wholesaler sold tyres to a retailer (who agreed to sell at the prices prescribed). The retailer in fact sold the tyres for a different price and the manufacturer sued the retailer. The court held there was no agreement between the manufacturer and the retailer, no privity of contract existed since no consideration passed between them for the promise to sell at a particular price. Consideration existed between the manufacturer and the wholesaler, and another contract existed between the wholesaler and the retailer.

Consideration must be present (executory) or future, but cannot be past consideration [2.350] Consideration must not be past (ie, the consideration must be provided by one party at the same time the other party makes a promise), there must be a coincidence or current exchange. A promise of payment for services already rendered is past consideration and will not allow for an enforceable contract. A promise not to sue in the future is the giving up of a right and is good consideration for an enforceable promise. Case study Anderson v Glass (1868) 5 WW & AB (L) 152

[2.351] G promised A, an employee, higher wages, not only for the future, but also for a past period. G later refused to honour the promise. It was held that the contract was unenforceable for the past period because it was past consideration (ie, the work had been done and the wages paid).

Case study Roscorla v Thomas (1842) 3 QB 234; 114 ER 496

[2.352] R purchased, paid for and received a horse from T. R asked T for an assurance about the condition of the horse, which while given later turned out to be untrue. The price had been paid and there was no new consideration for the new promise as to the condition of the horse.

[2.355] However, the rule that past consideration is no consideration is subject to some limited exceptions: 1.

Where the consideration amounts to some past act or forbearance which was done at the request of the person making the present promise.

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2.

3.

4.

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The Bills of Exchange Act 1909 (Cth) provides that the consideration for a bill of exchange may be based on any antecedent debt or liability. Consideration is presumed to have been given for a bill of exchange unless there is proof to the contrary. A subsequent promise to pay a past debt on which action is barred by legislation in the States and Territories which limits legal action: eg, Limitation Act 1969 (NSW); Limitations of Actions Act 1958 (Vic). A subsequent promise to pay a debt contracted by a party whilst under a legal incapacity at the time of the contract (eg, certain contracts by intoxicated persons and those suffering from mental infirmity).

Consideration must not be vague and illusory [2.360] Consideration must be definite so consideration which is vague, imprecise or based on the natural love and affection which a person bears towards her or his relatives is not sufficient to support a simple contract. Promises such as an undertaking not to “be boring” or to “be pleasant” are vague. Moral obligations, as well as promises of natural love and affection, are not good consideration. Where the consideration given is a promise, which the promisor can decide whether or not to keep it, is not good consideration: Loftus v Roberts (1902) 18 TLR 532. Case study Shiels v Drysdale (1880) 6 VLR (E) 126

[2.361] There was an agreement by a married woman to look after her parents as long as they lived, in return for, when requested, an interest in some of their land. It was held void for uncertainty as no particular land was indicated.

Case study White v Bluett (1853) 23 LJ Ex 36

[2.365] A son who had been lent money by his father signed a promissory note in favour of his father to evidence the loan. The son constantly complained to his father about the father's insistence on him signing the promissory note. The father told the son he would forgive the repayment of the debt if the son would cease his harassment. When the father died his executor enforced the original promissory note; a court considered whether the son's promise to stop complaining was sufficient consideration for promise not to enforce a loan. The court decided that there was no consideration as the promise was too vague and nebulous.

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Consideration must have some value but need not be adequate or equivalent to the promise [2.370] Consideration need not be adequate (ie, commercially reasonable or equivalent), although it should be noted that the courts leave this question to be decided by the parties at the time of making the agreement. It is possible for a valid contract based only on payment of $1; a party may receive a rental premises for very low rent, this is sometimes called a “peppercorn rent” representing the nominal value given. Case study Chappell & Co Ltd v Nestlé Co Ltd [1960] AC 87

[2.375] To promote the sales of their chocolate, Nestlé ran a promotion offering a record for 1 shilling and sixpence and three wrappers from a sixpenny bar of chocolate. The plaintiff brought an action for infringement of copyright and Nestlé offered to pay them royalties based only on the 1 shilling and sixpence. It was held that while the wrappers themselves were of no value, as they were thrown away, they formed part of the consideration because to get a record the purchaser had to provide both money and wrappers. As a result, Nestlé had to pay a royalty based on 3 shillings.

An inadequacy of consideration may suggest unfair dealing. This may render the contract void or voidable (this is discussed in Topic 3). Consideration which is illegal is not enforceable, nor is consideration which is impossible or unrealistic to perform within the agreement.

Consideration must be legally sufficient [2.380] Consideration must comprise something that the law recognises as valuable. This is often referred to as the requirement that consideration must be sufficient or “something of value in the eyes of the law” and must be distinguished from adequacy. The rules as to sufficiency of consideration are designed to ensure that there is, in fact, an exchange of value between the parties to a contract and not a mere illusion of exchange. There is an expression “peppercorn rent” which means even a single peppercorn (or small value) could be sufficient as consideration for a binding contract.

Repeating an existing duty imposed by the law [2.390] There is no consideration if all that the promisor does or promises to do amounts to no more than that which he or she is already obliged to do or refrain from doing, eg, under contract or lawful duty: • A duty already required by law is not consideration:

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Case study Collins v Godefroy (1831) 1 B & Ad 950; 109 ER 1040

[2.391] Collins received a subpoena and was promised money by G if he attended court. No money was paid, Collins sued but failed because he was only promising something he was legally required to do.

Note, however, if a party promises to do more than what is required by law, this may amount to good consideration for a promise: Case study Glasbrook Bros Ltd v Glamorgan County Council [1925] AC 270

[2.392] Mine owners promised to pay police for extra protection against striking miners, even though the police were already providing what was considered adequate patrols. A court found that there was adequate consideration because the police had gone beyond what was required legally.

[2.393] • The rule in Pinnel’s Case (1602) 77 ER 237: the promise of a payment of a lesser amount for the full amount owed is not consideration for a promise not to sue for the full amount. The threat of a debtor not to pay unless the creditor accepts a lesser amount is not an enforceable bargain. Similarly, a promise to fulfill an existing contract in the same way is not consideration for a new agreement: Case study Foakes v Beer (1884) 9 App Cas 605

[2.394] Foakes owed money under a court order to Beer. Foakes promised to repay the money in instalments as long as Beer promised not to charge interest. The money was repaid and Beer sued for interest. Foakes relied on their agreement in court, but the court found there was no consideration for the promise to forgo interest since he was merely fulfilling an existing contract.

[2.395] • Exceptions to the rule in Pinnel’s Case (1602) 77 ER 237 where part payment may be good consideration. Part payment by a third party may discharge a debt, preventing the creditor from suing for the balance. Where to allow the creditor to sue would amount to a fraud on the third party if they had been led to believe that their part payment would discharge the debt is referred to as fraud on a third party:

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Case study Hirachand Punamchand v Temple [1911] 2 KB 330

[2.396] The debtor's father sent his son's creditor a letter offering to pay a lesser sum in full discharge of his son's debt and enclosed a draft which the creditor cashed. When the creditor subsequently sued the son for the balance of the debt, it was held that the acceptance of the lesser sum from the father discharged the debt and to then sue would be a fraud on the father.

[2.397] • Other exceptions to Pinnel’s Case (1602) 77 ER 237 which might amount to good consideration are where: – the debtor makes a pre-payment, or agrees to pay in a different manner to their detriment, eg, paying earlier than required; – if there is some legal agreement, composition or settlement with the creditors, eg, a bankrupt is given a release for the payment of a lesser amount agreed by those owed money; or – there is promissory estoppel: see [2.410].

Completing an existing contractual duty is not consideration for an extra payment [2.400] Repeating an existing duty owed to the promisor is insufficient consideration as there is no detriment: Case study Stilk v Myrick (1809) 2 Camp 317; 170 ER 1168

[2.401] A number of sailors signed on to sail from London to the Baltic and back. During the course of the voyage, two sailors deserted and because the captain was unable to find two replacements, he promised the remaining sailors the wages of the two deserters if they would sail the ship back to London. This was agreed and the ship safely returned but the owners refused to pay. It was held that as the desertion did not change the remaining sailors' contractual duty to sail the ship safely home, the promise was unenforceable.

[2.405] However, if the promisor derives some additional benefit or the acts are in excess of their contractual duty (eg, in Stilk v Myrick (1809) 2 Camp 317; 170 ER 1168 the return voyage was made dangerous by the smaller number of sailors), there would be good consideration. In Hartley v Ponsonby (1857) 7 E & B 872; 119 ER 1471, a number of crew deserted and the remaining crew were offered extra money if they completed the journey. In this case, when the owners reneged on the agreed extra payment, the court held there was consideration for an enforceable agreement since the journey was dangerous and different from what the crew had originally contracted to do. Where contractors can show new circumstances or onerous conditions under which 76 [2.396]

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they extracted some extra payment then they may be successful in enforcing the contract. Note also Glasbrook Bros Ltd v Glamorgan County Council [1925] AC 270 at [2.392].

Estoppel [2.410] The law of estoppel (an equitable remedy) prevents a party from enforcing their strict contractual rights where it would be unconscionable for them to do so, a principle of law sometimes referred to as promissory estoppel. As such, the doctrine will not allow a party to claim that there is no contract (due to lack of consideration) where this would be unfair: Case study Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130

[2.411] The plaintiff leased a block of flats in London to the defendants in 1937 for £2,500 per annum. In 1940 the defendants agreed to reduce the rental to £1,250 for the duration of the war (because of the difficulty in finding tenants). In 1945 the flats were again fully let and the defendant claimed rental arrears for the last two quarters of 1945. It was held that the defendant was entitled to the last two quarters of 1945 but not for the full rental period despite the fact that the defendant had given no consideration for the plaintiff’s promise not to demand the full entitlement. The plaintiff was prevented (ie, estopped) from going back on his promise as this would have been unfair to the defendant.

For a plaintiff to successfully raise an estoppel, it must be shown that the defendant made a promise (such as a contractual promise) or representation, or allowed or encouraged the plaintiff to adopt an assumption; and in all the circumstances, it would be unconscionable to allow the defendant to retreat from this promise, representation or assumption: Case study Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387

[2.412] Waltons Stores negotiated with Maher for the lease of commercial premises. Under the proposal Maher was to demolish an existing building and erect a new one to be leased by Waltons. Documents were drawn up and Maher's solicitor forwarded them to Waltons' solicitors. Receipt was not acknowledged for some two months as Waltons were reconsidering their country retail strategy. Meanwhile, Maher sought finance for redevelopment of the site to ensure completion by the required date. With the building about 40% complete, Waltons' solicitors advised Maher they did not intend to go ahead. No binding contract to lease the premises had been concluded as there had been no exchange of documents. It was held that it was unconscionable of Waltons to retain the documents and remain silent when it was aware that Maher was exposing himself to financial detriment by acting on a false assumption that the lease was proceeding.

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Case study Commonwealth v Verwayen (1990) 170 CLR 394

[2.413] A sailor was injured when two destroyers collided, he sued for damages and the Commonwealth agreed to allow those damages. The Commonwealth later tried to invoke the Statue of Limitations and deny payment of damages. The court found this to be unconscionable since the Commonwealth had agreed to pay damages and the sailor had acted on that promise.

[2.415] The test for unconscionability in this context is whether there has been material detrimental reliance by the plaintiff on the relevant statement, representation or assumption to the knowledge of the defendant. Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 is an Australian case and allows a plaintiff to use the doctrine as a sword rather than a shield, ie, it can be used to initiate an action if the promisee, relying on a promise, has suffered some loss. By contrast, in the UK promissory estoppel is a defence against an action by another. Figure 2.4: Consideration — estoppel — formalities — part performance

Promissory estoppel does not prevent the promisor from reverting to their original position where the contract is of a continuing nature. The promisor must give due notice to the promisee that they are reverting to the original contract.

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Generally, where an estoppel can be established the court will order the minimum remedy required to reverse the effect of the detriment (unlike in contract law where the usual remedy is damages).

CONTRACTUAL CAPACITY Principles [2.420] The parties to a contract may have satisfied the rules or elements required in forming a contract, but the agreement may not be enforceable because one of the parties is considered incapable of entering the contract because of some physical, mental or legal disability. A person may be incapable of understanding the agreement because of their age, mental impairment or because the law has restricted a party’s ability to enter an agreement, eg, a bankrupt. If a party does not freely enter an agreement, there is not a fair bargain or a meeting of the minds which the law should enforce. Where one or more parties to a contract lack contractual capacity the contract may be rendered either void or voidable. Incapacity of a party may make the contract void, which means the whole contract is invalid or unenforceable. Alternatively, the incapacity may cause the agreement to be voidable at the option of one party, which means the contract is valid but only one party (not both) can enforce the contract. Essentially, the issue of incapacity is designed to protect people who are at a disadvantage, and who are not able to bargain in an equivalent manner with the other party (this excludes some parties on whom the law has imposed some restriction). Persons who may lack contractual capacity include: • minors (or infants) (ie, persons under 18 years of age); • mentally incapacitated persons; • intoxicated persons; • corporations; and • bankrupts.

Minors (or infants) [2.430] Legislation in all States and Territories provides that natural persons have full contractual capacity at the age of 18 years (under the Age of Majority Acts, eg, Age of Majority Act 1977 (Vic)). Most States and Territories follow the common law principles as to contractual obligations of minors, but various statutes may actually modify the common law. The common law originally held that an adult had to be at least 21 years of age!

Common law position [2.440] When dealing with minors, the position at common law is that there are three categories of contracts that may be entered into by minors: those that are valid, those that are voidable and those that are void. The effect of the [2.440] 79

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common law rules is that it would be unwise to contract with a minor, except for necessaries or beneficial contracts of service, because the minor may later seek to avoid the contract. Another party to the contract may therefore require a guarantee before entering an agreement with a minor.

Valid contracts [2.450] The only contracts with minors that remain valid at all times are those for necessaries and beneficial contracts of service. Necessaries are goods or services that will maintain the minor in reasonable comfort according to their lifestyle and the position in life they occupy (ie, how well off they are and according to what they expect from life). The sale of goods legislation of the States and Territories defines necessaries as goods that are suitable to the minor’s condition in life and to her or his actual requirements at the time of sale or delivery. Necessaries are education, food, shelter, clothing, health and transport, as required by a minor according to their “station in life”, ie, their occupation, lifestyle and social status. If a minor is already adequately supplied, then a good or service may be a luxury rather than a necessary. For goods or services to be considered necessaries, the plaintiff must be able to establish two issues: • that the unpaid goods or services are capable of being necessaries for a person in the circumstances of the minor in question. A question of law: Case study Bojczuk v Gregorcewicz [1961] SASR 128

[2.451] A minor who lived in Poland and had a good job there (by Polish standards), wished to emigrate to Australia. She borrowed money from an Australian relative (Bojczuk) and failed to repay him after promising she would. It was held that she was not liable to repay the money as the plaintiff could not establish that the loan was capable of being a necessary as she already had a satisfactory job by Polish standards.

• that if the goods or services are capable of being necessaries, they are necessaries in the particular circumstances. A question of fact: Case study Scarborough v Sturzaker (1905) 1 Tas LR 117

[2.452] Sturzaker rode some 15 miles to work on his bike. He bought a new bike and traded in his old bike as part payment before delivery. When he tried to avoid the contract, it was held that the bike was capable of being classed as a necessary (transport), and in this case was a necessary because he had traded in his old bike.

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If a plaintiff can establish before a court that a good or service was a necessary then the minor must pay a reasonable price for it. Otherwise if the goods are not necessaries the minor does not have to pay, nor even return the goods, unless the minor had used fraudulent means to obtain them. Beneficial contracts of service are basically contracts of employment, apprenticeship, training or education. Whether a contract of service is beneficial to a minor as a whole is a crucial question of fact which requires: • examination of the contract as a whole; • balancing of the benefits gained and the detriments suffered by the minor as a result of the agreement: Case study De Francesco v Barnum (1890) 45 Ch D 430

[2.453] Barnum, a 14-year-old, entered into a seven-year apprenticeship agreement with De Francesco to be taught stage dancing. She agreed not to marry during the apprenticeship and would not accept professional engagements without the plaintiff's permission. The plaintiff did not have to provide engagements, maintain her while she was not working, pay her anything more than a minimal amount, and could terminate her apprenticeship at any time. It was held that the terms of the apprenticeship were unreasonable and unenforceable.

• and deciding whether the benefit is in favour of the infant: Case study Hamilton v Lethbridge (1912) 14 CLR 236

[2.454] While still an infant, the defendant had entered into articles of clerkship with the plaintiff. One of the terms of the agreement was a clause stating that the defendant would not practise within 50 miles of the plaintiff. A year after articles, the defendant set up a practice in the same town as the plaintiff. It was held that the benefits gained by the minor as a result of articles outweighed the detriments imposed under the contract of not working as a solicitor within 50 miles of the plaintiff.

[2.455] Note that not all contracts that may give benefits to the minor will be enforceable, eg, a contract may give financial benefits through trading, but will not be enforceable as it is not in the same class as a beneficial contract; a minor entering a hire-purchase contract for a truck to run a haulage business was not bound: Mercantile Union Guarantee Corporation Ltd v Ball [1937] 2 KB 498.

Voidable contracts [2.460] Contracts which will be rendered voidable for lack of capacity can be divided into two categories (both of these categories exclude contracts for necessaries and beneficial contracts of service). [2.460] 81

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Enduring contracts (ie, contracts of a permanent nature) are contracts under which the minor will obtain a lasting benefit (eg, a contract under which the minor acquires an interest in land or shares, a leasehold interest, an interest in a partnership), and are binding unless repudiated by the minor during their infancy or within a reasonable time of turning 18 years of age. The minor will remain liable for any obligations that might have accrued up until the time of repudiation unless the minor received no benefit at all (ie, there has been a total failure of consideration, in which case any money paid under the agreement may be recovered): Case study Steinberg v Scala (Leeds) Ltd [1923] 2 Ch 452

[2.461] A minor applied for shares in a company and paid the amounts due on application and at the first call. She received no dividends and attended no meetings. After 18 months and while still a minor she repudiated the contract and asked for her money back. It was held that she could repudiate but that the money paid was irrecoverable as the allotment of shares was a benefit as the shares, at one period, had value.

[2.465] If the minor does receive some benefit or use of goods under an agreement which they can repudiate, then in exercising the right to repudiate they lose the right to claim back any moneys already paid (but have nothing further to pay): Pearce v Brain [1929] 2 KB 310. Temporary contracts are contracts which are not of a continuing nature (eg, goods that are not “necessaries”). These contracts require express ratification of the minor, after attaining 18 years of age, to make them binding. In Victoria, such contracts are absolutely void.

Void contracts [2.470] In Victoria, the Supreme Court Act 1986 (Vic) s 50 deems contracts for the repayment of a loan during infancy, payment of goods supplied or to be supplied (other than necessaries) and accounts stated to be void for lack of capacity, regardless of their ultimate purpose and any benefit accruing to the minor. In all States a minor is not liable on a bill of exchange (including a cheque) or contracts providing security to repay moneys. Similarly, a minor cannot contract to give an undertaking of security to repay an advance of moneys; even if the money was to purchase necessaries, the agreement is void: Martin v Gale (1876) Ch D 428. These contracts are not enforceable by either the minor or the other party to the agreement. Victorian legislation voids any guarantee given by a minor to repay borrowed moneys once they become an adult: Supreme Court Act 1986 (Vic) s 51.

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Torts [2.480] A minor is generally liable for any tort they commit unless the action would be an indirect means of enforcing the agreement. For example, if a minor uses fraudulent means to induce another party to contract with them, they will not be liable under the tort of deceit since this is an indirect means of enforcing a contractual remedy. Note, however, New South Wales has abolished this rule (Minors (Property and Contracts) Act 1970 (NSW) s 48), so a minor (in New South Wales) who commits a tort is answerable whether or not the tort was connected with a contract.

New South Wales [2.490] The common law position has been abrogated in New South Wales in favour of a statutory system under the Minors (Property and Contracts) Act 1970 (NSW) which replaces pre-existing common law and equity, and attempts to make infants liable in contract if they understand a contract is for their benefit. Under this Act certain classes of contract are deemed to be presumptively binding on minors, including: • a presumption that a contract is binding (s 17), with some “exceptions” called “civil acts”, ie, legal and equitable rights and choses in action (s 6(1)); • agreements for the acquisition or disposition of property to/by a minor where the consideration paid/received by the minor was not manifestly excessive/inadequate (s 20) or accompanied by a certificate in accordance with ss 28, 29; • contracts for the benefit of the minor (s 19); • contracts affirmed by the minor upon attaining majority (s 30); • pre-arranged capacity by order of the court (s 28); • beneficial contracts of service. A civil act may be repudiated in writing by a minor at any time during minority or before attaining the age of 19 years. The court is given wide powers to adjust the rights of the parties to a repudiated contract and may take account of any misrepresentation on the part of the minor which induced the contract.

South Australia [2.500] The position in South Australia is similar to the common law position described at [2.455], subject to two major exceptions: • enduring and temporary contracts (as defined at [2.460]) are both treated as non-binding unless ratified upon attainment of majority; and • a contract to be entered into by a minor may be approved by a court, thereby defeating any challenges based on lack of contractual capacity. [2.500] 83

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Mentally incapacitated and intoxicated persons [2.510] Mentally incapacitated and intoxicated persons will be liable under contracts for necessaries but are only obliged to pay a reasonable price, which is also emphasised in statute, eg, Goods Act 1958 (Vic) s 7. The law treats both of these conditions similarly, noting that intoxication might have resulted from a variety of substances. All other contracts entered into by mentally incapacitated or intoxicated persons will be voidable (ie, the party under the legal disability can avoid the contract or affirm it if they lose their disability), where: • they were incapable of understanding the nature of what they were agreeing to at the time they contracted; and • the other party was aware, or should have been aware, of their incapacity. The onus of proof lies on the person wishing to repudiate the contract and must occur within a reasonable time of losing their disability. Note, however, a person who is mentally incapacitated (or intoxicated) cannot avoid a contract if the other party was not aware of their mental incapacity: Hart v O’Connor [1985] AC 1000. Note that a person who is mentally incapacitated, eg, by depression, may still be held to be capable of understanding a contract and being bound by it: Steele-Smith v Liberty Financial Pty Ltd [2005] NSWSC 398.

Corporations [2.520] All companies incorporated under the Corporations Act 2001 (Cth) (those with Ltd, Pty Ltd or NL after their names) are legal persons and have full contractual capacity similar to a natural person: s 124. Incorporation gives a company a separate legal existence from that of its members, with its own rights and liabilities: see Chapter 27 (Davenport). The promoter of a new company or the company itself after it has been registered, may be liable for any pre-registration contract entered before the company came into existence: s 131(1). A company as an artificial entity must operate through its agents who under the assumptions in ss 128 and 129 will bind the company for any contracts or obligations they incur on behalf of the company, unless the outsider was aware that the agent was acting inappropriately or outside their powers. A company will still be liable for agreements that breach the company’s own rules (constitution); these are internal breaches only, and do not affect the validity of any contracts made with outsiders: s 125. Incorporated associations are not-for-profit bodies, established under State and Territory legislation. An incorporated association similarly has a separate entity from its members and can enter into any contract. Unincorporated associations generally cannot enter into contracts and the managers or members of such a body may be personally liable for any contract they make on behalf of the body: see Chapter 27 (Davenport). 84 [2.510]

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The Crown [2.525] The Crown is the government, either at federal or State and Territory level. The Crown is a “legal person” which can enter into contracts and sue and be sued, which of course requires agents to act on its behalf. The Crown can be sued for damages under the Crown Proceedings Acts in the various jurisdictions.

Bankrupts [2.530] The Bankruptcy Act 1966 (Cth) limits many of the rights of a bankrupt person during the time of the bankruptcy and for a period before the bankruptcy commences (known as the “relation-back” period). An undischarged bankrupt must disclose their status to any person who is providing them with credit: the threshold for this disclosure is indexed and in 2014 was $5,360, with penalties applying if the bankrupt fails to disclose where an amount above the threshold is involved. The bankrupt’s property vests (passes) to the Official Trustee in Bankruptcy, or a registered trustee, and this includes any active contract entered into prior to the bankruptcy: s 58(1). An undischarged bankrupt cannot carry on business under a different name without disclosing their status, and a bankrupt is not permitted to be a director of a company: see Chapter 31 (Davenport). Figure 2.5: Void or voidable contracts

Contractual capacity and minors: common law position [2.540] Use the table below in conjunction with Figure 2.6 below to determine whether a prima facie valid contract entered into by a minor remains valid. Table 2.3: Void, voidable or valid contracts with minors Contracts void at common law – Bills of exchange given by a minor – Contracts providing security for a debt

Contracts voidable at common law – Enduring contracts (excluding contracts for necessaries and beneficial contracts of service) – Temporary contracts (excluding contracts for necessaries and beneficial contracts of service)

Contracts valid at common law – Contracts for “necessaries” (but minor is only bound to pay a reasonable price) – Beneficial contracts of service

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Contracts void at common law

Contracts voidable at common law

Contracts valid at common law

– Contracts for the repayment of money lent (in Victoria only) – Contracts for the payment of goods supplied or to be supplied (in Victoria only and in respect of contracts other than those for necessaries) – All accounts stated (in Victoria only)

Figure 2.6: Void, voidable or valid contracts with minors

CONTRACTS AND INTERPRETATION OF THE CONTRACT Principles [2.550] When a contract is formed it contains the points to which the parties agreed. These points are called the terms of the contract. Terms contained in a contract may be either express or implied. If a term in the contract is not complied with, then this is a breach of contract and the parties to the agreement may either end the contract or sue for damages.

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Express terms [2.560] Express terms are those which are specifically stated in the written contract, or spoken in an oral contract. The difficulty with an oral contract, however, is proving what was actually said; this may require evidentiary proof, or perhaps may involve determining the contractual terms from the actions of the parties. When a dispute arises as to the meaning of a contract, it is necessary to interpret the terms of the contract in order to find out what was the intention of the parties: • In the case of an oral contract, the express terms of the contract will be ascertained by looking at the words used by the parties at the time the contract was made and this is a question of fact. In the event of a dispute, it becomes a question for the court to decide. • In the case of a written contract, the general rule is that all the terms of the contract are to be found in the written document. Their interpretation is a question for the court based on an objective test of what a reasonable person in the position of the parties would have understood them to mean, taking into account the surrounding circumstances known to the parties, including prior dealings, and the purpose and object of the transaction.

Parol evidence rule (PER) [2.570] If a contract is put in writing and it appears that the parties intended this to be an appropriate record of the agreement, then normally the courts will not allow any oral evidence which adds to, contradicts or varies the terms of the written contract. This is called the parol evidence rule (PER) and in this context, “parol evidence” means evidence given by word of mouth. The parol evidence rule is a commonsense rule which assumes that parties who bother to put the agreement in writing intend that such a document is complete. This is sometimes referred to as the four corners rule so that if the contract is in writing, it is assumed that the contract contains all the terms of the contract, ie, all terms are presumed to be contained in the four corners of the contract and there is no reason to look beyond the contract itself. The purpose of this rule is to preserve the agreement and not have it changed later through extrinsic evidence. Some contracting parties may include in their contract a “whole of agreement” or “entire agreement” clause. This is a clause which simply states that the written contract is intended to contain the whole of the agreement between the parties. For instance: This document contains the entire agreement between the parties about its subject matter. Any previous understanding or agreement relating to that subject matter is superseded by this document and has no further effect.

While the parol evidence rule is the first assumption, the law does allow for some exceptions to this rule where the strict application of the rule leads to [2.570] 87

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hardship or injustice. If a court does allow for extrinsic evidence of terms not contained in the document, that evidence will be overruled by the document’s terms if “other” terms are inconsistent: Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471. Extrinsic evidence may be permitted by a court in making an objective assessment of the parties’ intended terms of agreement. The exceptions to the rule are: • consideration of surrounding circumstances where the language is ambiguous or capable of more than one meaning, allowing for extrinsic evidence to assist; • where the parties to the contract intended that oral terms are agreed upon, even though not included in the written contract (partly written and partly oral), and where extrinsic evidence can prove this; • evidence of the subject matter or identity of the parties: Figure 2.7: Parol evidence rule

Case study Giliberto v Kenny (1983) 48 ALR 620

[2.571] In a contract for the sale of land the purchaser was variously described as “Mrs Kenny” and “Mr Kenny”. The document was signed by “Mrs Kenny”. It was held that extrinsic evidence was admissable to show whether Mrs Kenny was acting for herself as well as acting as an agent for her husband.

• proving a trade custom or usage, implied terms that are usual within an industry; • a collateral verbal agreement relating to the same subject material and not inconsistent with the written contract:

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Case study Van Den Esschert v Chappell [1960] WAR 114

[2.575] Before signing a contract for the purchase of a house, the purchaser asked the seller whether there were any white ants in the house. On being assured there were none, the purchaser proceeded to sign the contract which contained no reference to white ants. Some months later the purchaser discovered white ants in the house. It was held the purchaser could recover the cost of removal of the white ants and for repairs as the assurance was intended to form part of the agreement. If the contract had actually specified a term, then this would have negated the oral undertaking: Hoyt's Pty Ltd v Spencer (1919) 27 CLR 133.

Figure 2.8: Breach of an express term of a contract

• where the written document was intended to be a note or receipt and not designed to contain all the terms of the agreement, parol evidence may be called to show what the agreement was; [2.575] 89

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• evidence that the contract was obtained by reason of fraud, duress, undue influence or unconscionability. • Variation or rectification by the parties of the existing contract to add or clarify terms of the contract.

Distinguishing terms from representations [2.580] Not all statements made by a party during the course of negotiations to induce another to enter into a contract will be regarded as terms of the contract. Thus, it is important to distinguish between contractual terms (clauses of the contract) and mere representations: • representations are mere statements made by the parties in the course of negotiating a contract which are calculated to induce the ultimate agreement but not intended to comprise part of the contract: Oscar Chess Ltd v Williams [1957] 1 WLR 370. Representations may be mere puff designed to get another party’s attention; • terms are important statements and must be promissory in nature and intended to form part of the agreement. In a leading case dealing with issues of the promissory nature of precontractual terms, a court will consider whether a statement could reasonably be considered to be a promise, according to the circumstances and the strength and significance of the words used, eg, “we agree” versus “we estimate”: Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41. Where a representation is misleading or deceptive, the maker of the statement may find themselves liable under statute law (eg, s 18 of the Australian Consumer Law (ACL), the ACL being Sch 2 of the Competition and Consumer Act 2010 (Cth)), or liable for misrepresentation or promissory estoppel. However, where a term has not been complied with, it is possible to sue the party who agreed to the term for breach of contract. The difference between a term of a contract and a representation which induced that contract is often difficult to identify. This task is made easier, however, when a written contract contains an “entire agreement” or “whole of agreement” clause. This is a clause stating that the written document comprises the whole of the contract and any extraneous statements are merely representations. Where the contract does not contain a “whole of agreement clause”, for a statement to constitute a term it must be promissory (contractual) and this depends on the intention of the parties as determined objectively from all the circumstances of the case including: • the importance of the truth of the statement to the innocent party; the more important, the more likely it is to be a term; • whether the innocent party would have entered into the contract if they knew the statement was not true; 90 [2.580]

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• the time lapse between the making of the statement and the final agreement (the longer the lapse, the more likely the statement is not intended to form part of the agreement; the closer the statement is to the contract, the more likely it is to be a term); • whether there is a written contract; if so then terms are assumed to be in the written document; • whether the innocent party was asked to verify the statement; • whether the statement was made with the intention of preventing the other party from finding any defects and whether it succeeded; • the importance the parties attached to the statement; • whether one of the parties possessed special skill or knowledge; and if so then their representations are more likely to be a term of the contract: Case study Oscar Chess Ltd v Williams [1957] 1 WLR 370

[2.581] The defendant traded his second-hand car to the plaintiff dealers for a new one. The car's appearance and the papers supplied by Williams indicated it was a 1948 model and he was given £290 trade-in. However the car was a 1939 model, the models having remained the same in the intervening years and worth only £175 as a trade-in. A previous owner of the car had fraudulently altered the date in the logbook. The dealers sought to recover the difference in trade-in price on the grounds that the defendant's representation as to the year of manufacture was a term of the contract. It was held that the statement was a mere representation as the dealers had special expertise and should have taken steps to verify the age of the car.

• the more precise a statement, the greater the emphasis on the statement, and the more likely it is to be a term: Case study Nemeth v Bayswater Road Pty Ltd [1988] 2 Qd R 406

[2.582] A reference by one party to a possible hourly use of an aeroplane was not a firm statement, but rather an indication of what “might” be possible.

Incorporation of certain terms not stated in the contract [2.585] Many written contracts, including standard form contracts, may incorporate other terms by either reference or other means, eg, see employment contracts that incorporate company policies as part of any employment. Terms may be incorporated by: • Signature: on signing, the signatory is bound by all the terms of the document, whether read or understood by that party. [2.585] 91

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• Reference and reasonable notice of terms in other documents, eg, policies and rules as to safety, though much depends on the adequacy of that notice. • A prior course of dealing: where there has been persistent and obvious use of terms under which the contract operates, that objectively they are so well known as to be expected.

Collateral contracts [2.590] It is possible that while a statement might not be considered a term, the court might be prepared to treat it as a collateral contract (or collateral warranty, the terms being used interchangeably by the courts). A collateral contract is an agreement that operates concurrently with the main contract where the consideration for entering into the collateral contract was entering into the main contract: Case study De Lassalle v Guildford [1901] 2 KB 215

[2.591] The plaintiff refused to enter into a lease of a house until he was assured by the landlord the drains were in good order (he had been flooded before). He was given a verbal assurance but no reference to the drains was included in the lease. However, the drains were faulty. It was held that the defendant's assurance that the drains were in good order was an oral “collateral” contract, the breach of which entitled the plaintiff to damages.

In order for a representation or statement to be valid and enforceable, the following must be shown: • that the terms of the collateral contract must not be inconsistent with the terms of the main contract: Case study Hoyt's Pty Ltd v Spencer (1919) 27 CLR 133

[2.592] Spencer sublet premises to Hoyt's for a period of four years. The written sublease contained a term that Spencer could terminate the agreement at any time by giving four weeks' notice in writing, which Spencer subsequently did before the end of the lease. Hoyt's then claimed damages for breach of a verbal promise given by Spencer prior to signing the sublease that he would not terminate unless required to do so by the head lessors. It was held that the defendant's verbal agreement and the unqualified proviso in the written sublease were inconsistent and therefore the court was not prepared to find a collateral contract.

• and that the statement or representation is promissory in nature (ie, intended to have contractual effect):

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Case study JJ Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435

[2.593] During negotiations for the purchase of a boat, Blakney sought the written advice of the defendants as to various engines which could be used and they commented on three types, recommending one in particular, stating it would have an estimated speed of 15 miles per hour. Blakney accepted this recommendation and contracted to buy the boat but the contract contained no reference to speed. When the motor was fitted to the boat, it failed to achieve the speed quoted and Blakney sued for damages for breach of a collateral warranty. It was held that while the defendant's statement as to speed induced Blakney to enter the contract, it was not promissory, but rather an expression of opinion, or representational in nature.

[2.595] In JJ Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435 the purchaser failed to show that representations were promissory, however in Ellul v Oakes (1972) 3 SASR 377, a court found that where pre-contractual representations were likely to and intended to induce another party to enter into the contract, then the onus is on the party making the statement to show it was not promissory.

Terms [2.600] If it is found that a statement is not a collateral contract but a term, it has to be determined what sort of term it is because the remedies available to an innocent party under each type of term differ. The terms of a contract comprise express and implied terms and may in turn be classified as either conditions or warranties.

Conditions and warranties [2.610] A condition is an essential term of the contract, the breach of which entitles the innocent party to terminate the agreement and/or sue for damages. Warranties are less important terms and only allow the innocent party to sue for damages. Whether a term is a condition or a warranty depends on the intention of the parties, which may be inferred from the contract document and surrounding circumstances: Case study Bettini v Gye (1876) 1 QBD 183 [2.611] Bettini, an experienced opera singer, contracted with Gye to sing for his opera company. A term in the contract stated that Bettini would be in London six days prior to the start of the engagement for rehearsals. Owing to illness, Bettini arrived only two days prior and Gye attempted to terminate the contract. It was held that the term to attend rehearsals was subsidiary to the main purpose of the contract and would not prevent the singer from [2.611] 93

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performing, thus it could only be treated as a warranty and Gye was only entitled to damages for loss (if any).

But compare: Case study Associated Newspapers Ltd v Bancks (1951) 83 CLR 322

[2.612] Bancks contracted to supply the plaintiff newspaper with a comic each week, which the newspaper agreed would be published on the front page of their comic section. Owing to a newsprint shortage, the comic appeared on page three for three successive weeks and as a result Bancks treated this as breach of contract. It was held that the undertaking by the newspaper to print the comic on page one amounted to a condition of the contract because Bancks would not have entered into the contract otherwise.

Figure 2.9: Contract terms

Implied terms [2.620] In addition to the express terms found in a contract, other terms may be implied which the law nevertheless considers to be part of the agreement. These terms may arise either because the courts “read them” into the agreement reached between the parties (implied by the courts and include terms implied to give business efficacy to contracts, terms implied in specific kinds of contracts and terms implied by custom or trade usage) or legislation deems them to be part of certain agreements (“statutory implied terms”).

Terms implied by the courts [2.630] The courts may be prepared to imply terms into a contract in order to give “business efficacy” to the agreement. This happens rarely and the courts 94 [2.612]

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will do so only where the term to be implied is (see BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266): • reasonable and equitable; • necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; • so obvious that “it goes without saying”; • capable of clear expression; and • does not contradict any express term of the contract. This will generally only be the case where the term has been omitted from the contract through inadvertence or poor drafting: Case study The Moorcock (1889) 14 PD 64

[2.635] The defendant wharf owner contracted with the plaintiff, a shipowner, to unload the cargo at the defendant's wharf. The ship grounded at low tide and was damaged. It was held that the defendant was liable for the damage since the parties must have intended to contract on the basis of an implied term by the defendant that the dock would be reasonably safe to use.

Terms implied by custom or trade usage [2.640] Where the parties have contracted against the background of a particular trade or industry, the courts may imply terms into the agreement to reflect this. Again, courts rarely do this, and will only do so where the trade usage or custom is so well known by everybody in the trade. The parties are presumed as a question of fact to have intended customary practices to be implied as terms. Customary terms cannot be contrary to the written terms in the document created by the parties. In wider terms there could be implied terms under common law and equity, eg, an implied duty of good faith and fiduciary duty within a contract, or in the holding of moneys in trust.

Statutory implied terms [2.650] There are numerous pieces of legislation that imply terms into different kinds of contracts, these exist at both State and Territory level and through the Commonwealth. For instance, the Competition and Consumer Act 2010 (Cth) contains the Australian Consumer Law (ACL) which unifies consumer legislation throughout Australia, though there is still an application of State Sale of Goods Acts in some instances, ie, in business-to-business transactions: see Chapter 14 (Davenport). The ACL implies terms into consumer (and some non-consumer) contracts and does the following: • It imposes “consumer guarantees”, eg, “guarantees of acceptable quality”. A guarantee will apply in relation to compliance with any “express warranties” [2.650] 95

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that have been given by the supplier or manufacturer. “Express warranties” are defined very widely and will include representations and statements leading up to the contract, particularly if made in connection with the supply or promotion of goods, and it will not be possible to exclude liability for those representations. • It provides for remedies, which are referred to as consumer guarantees with “major” and “non-major” failures. A major failure allows consumers to reject goods, or alternatively elect to receive a replacement or refund. Consumers can bring an action for damages for reasonably foreseeable loss arising from a breach, or (in some circumstances) claiming compensation for the failure to receive the full value of the good or service. The ACL provides consumers with the following guarantees with respect to the supply of goods: • that the supplier has the right to sell the goods (Pt 3-2, s 51, noting that when ownership passes, so does the risk); • that goods are free from any undisclosed security (s 53); • that the consumer will have undisturbed possession of the goods (s 52); • that goods are of “acceptable quality” (s 54); • that goods are fit for the purpose that the consumer makes known to the supplier (s 55); • that goods match their description or a sample (ss 56 and 57); • that spare parts and facilities for the repair of goods are reasonably available for a reasonable period (s 58); and • that any express warranty is complied with: s 59. And the ACL provides further guarantees with respect to the supply of services: • that the services are carried out with due care and skill (s 60); • that services are fit for the purpose that the consumer makes known to the supplier (s 61); and • that services will be provided within a reasonable time: s 62. A major failure to comply with a consumer guarantee will occur where the relevant goods: • would not have been acquired by a reasonable consumer fully acquainted with the nature and extent of the failure; or • are substantially unfit for the purpose for which they are commonly supplied; or • depart significantly from a sample or description; or • are not fit for a purpose that was disclosed to the supplier; or • are unsafe. 96 [2.650]

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Additionally, consumer credit legislation implies terms into consumer credit contracts, insurance legislation implies terms into contracts of insurance, partnership statutes imply terms into partnership agreements, the Corporations Act 2001 (Cth) implies terms into shareholder contracts, and employment legislation implies terms into contracts of employment. There are numerous pieces of legislation that imply terms into contracts, so it is important to be aware of the statutory background against which any contract is made.

Exclusion clauses [2.660] Exclusion clauses (or exemption clauses) are contractual terms that aim to limit the existence or extent of one party’s ability to sue another for breach of contract. In the absence of such a clause, liability may have arisen for breach of an express or implied term, or even independently of the contract altogether in cases where the law imposes a duty of care entitling the party who has suffered injury as a result of the breach to sue in tort law: see Chapter 28 (Davenport). Statutes that affect exclusion clauses include the ACL, Pt 2-3, which basically strikes down unfair terms in a contract and the Competition and Consumer Act 2010 (Cth), which generally prohibits any attempts to exclude the provisions of that Act.

Signed contracts [2.670] In the case of a signed contract, if the exemption clause was included as a term in the contract and signed by the other party (always read anything carefully before signing), then in the absence of fraud or misrepresentation, the party signing is going to be bound by all the terms in that document, whether they have read them or not: Case study L'Estrange v F Graucob Ltd [1934] 2 KB 394

[2.671] L'Estrange agreed to purchase a vending machine from Graucob. He signed a contract which contained a number of terms in small print that he failed to read, one of which absolved Graucob from any liability if the machine failed to work properly, which it didn't. It was held that L'Estrange was bound by the terms as he had signed the contract.

[2.675] In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, a contract containing exemption clauses clearly stated “Please read Conditions of Contract”, indicating it was brought to the signatories’ notice, and when signed was binding.

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Unsigned contracts Is the exemption clause part of the contract? [2.680] To be effective, the clause must first be part of the contract. The person seeking to rely on the exemption clause must be able to show one of the following: • that the reasonable person would expect the document to contain contractual terms and not regard it merely as a receipt or voucher: Case study Causer v Browne [1952] VLR 1

[2.681] Causer left a dress for dry-cleaning and received a docket which contained terms excluding the dry-cleaners from liability for loss or damage to articles left with them. The dress was returned stained. It was held that the dry-cleaners were liable for damages. The docket did not constitute a contractual document because it was reasonable for the customer to assume that it was a voucher to produce when collecting the dress, not a document containing contractual terms. The firm had failed to make the customer aware that it contained special conditions.

• that reasonable steps had been taken to give sufficient notice of the term. The onus is on the person relying on the exclusion clause to prove the other party had knowledge that the document contained special conditions modifying the contract: Case study Parker v South Eastern Railway Co (1877) 2 CPD 416

[2.682] Parker left his bag in a railway station cloakroom. He was given a ticket which had printed on its face “See back” where there were a number of conditions, one of which limited the railway's liability for loss to £10 per item. The bag was lost and Parker claimed £24.10s. It was held that Parker was bound by the exemption clause even though he had not read it. The railway had done what was reasonably sufficient in the circumstances to make him aware of its terms.

Case study Thomson v London, Midland and Scottish Railway Co [1930] 1 KB 41

[2.683] Thomson, who was illiterate, asked her niece to purchase an excursion railway ticket for her. On the face of the ticket was “Excursion. For conditions, see back”. The back of the ticket contained a notice that the ticket was issued subject to conditions which could be found on the company's timetables, which cost sixpence. One of the terms on the timetable excluded the company from any liability for any injury, however caused. Thomson was 98 [2.680]

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injured due to the company's negligence. It was held, where the ticket was sold at a reduced rate, it was reasonable to assume that the ticket would be sold subject to certain conditions. Thus, the notice given was reasonably sufficient for an excursion passenger. The fact Thomson was illiterate was considered irrelevant by the court.

• that the terms were introduced into the contract before it was made. If notice of the clause was given after the contract was made, it will be of no effect: Case study Olley v Marlborough Court Ltd [1949] 1 KB 532

[2.685] The plaintiff and her husband booked into the defendant's hotel. After paying in advance and signing the register, they were shown to their room. On the wall was a notice stating that the proprietors were not liable for articles lost or stolen unless handed to the manageress for safe-keeping. Owing to the negligence of hotel staff, the plaintiff's furs were stolen from the room. It was held that as the contract had been made before the plaintiff went to her room, the subsequent notice of the exclusion clause was ineffective as it had not been incorporated into the contract.

• that there had been a previous course of dealings between the parties which had included an exemption clause, although here the court may require proof that the party against whom the exemption clause is invoked had knowledge of it.

Has the nature of the exemption clause been misrepresented? [2.690] The nature of the exemption clause must not be misrepresented to the other party, or the party seeking to rely on the clause will not be able to rely on it: Case study Curtis v Chemical Cleaning and Dyeing Co Ltd [1951] 1 KB 805

[2.695] Curtis delivered a wedding dress to the dry-cleaners and was asked to sign a receipt which contained a number of terms, one excluding the dry-cleaners from liability for any damage, howsoever caused. Curtis asked why she had to sign and was told that the dry-cleaners would not accept liability for damage to beads or sequins. The dress was returned stained. It was held that the effect of the clause had been misrepresented to Curtis and the dry-cleaners could not rely on the clause.

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Interpretation of exemption clauses [2.700] If the exemption clause has been properly incorporated into the contract, it will be construed and interpreted strictly against the party attempting to rely on it; this is the contra proferentum rule: Case study Elder Smith Goldsbrough Mort Ltd v McBride [1976] 2 NSWLR 631

[2.701] At an auction, one of the conditions of sale provided that “all lots are available for inspection previous to the commencement of sale, the same are sold with all faults, if any”. It was held that the words “with all faults” only referred to faults that could be revealed by an inspection and did not exclude liability for hidden faults.

To be effective, clear wording must be used if it is to exclude a party from liability for negligence. Exemption clauses generally do not operate outside the terms or scope of the contract. It is a question of interpreting the clause according to its ordinary and natural meaning, taking the contract as a whole: Case study Sydney City Council v West (1965) 114 CLR 481

[2.702] The plaintiff parked his car at the defendant's carpark and was issued with a ticket which contained on its back the following: “The council does not accept any responsibility for loss or damage to any vehicle … however such loss, damage … may arise or be caused,” together with a statement that the ticket must be presented before taking delivery of the car. A carpark attendant allowed an unauthorised person to take West's car after the person had claimed he had lost the original ticket and presented another ticket (which had a different registration number on it). It was held that the council could not rely on the exemption clause as release of the car was not merely a negligent act but was a delivery outside the terms of the contract.

Case study Photo Production Ltd v Securicor Transport Ltd [1980] AC 827

[2.703] Securicor contracted with Photo Production (the plaintiffs) to provide a security patrol for their factory. One night while on patrol an employee of the defendants deliberately started a fire at the factory, causing significant damage. The contract contained an exemption clause which provided that Securicor were “under no circumstances” liable for the injurious acts of their employees unless they could have been foreseen or were solely attributable to the negligence of an employee acting within the course of their employment. It was held that the exemption clause was clear and unambiguous and as the company could not have foreseen such an act by an employee, they were protected from liability.

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Case study Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500

[2.705] Delco entered into a written contract with Darlington, a futures trader. The contract contained a clause excluding liability of the broker to the client and a clause limiting the liability of the broker to the client to $100 in cases where liability had not been totally excluded. The broker was proved to have exceeded his authority in certain dealings on behalf of his client. It was held that the clause excluding liability did not apply in this case because the broker had acted without the investor's authority. However, the limitation clause was effective to limit the broker's liability.

Has the exclusion clause been limited or abrogated by a statutory provision? [2.710] The ACL under s 64 specifically prohibits exclusion clauses that attempt to oust consumer guarantees. In ss 23 and 24 the ACL also applies provisions regarding unfair terms as follows: 23 Unfair terms of consumer contracts (1)

(2)

A term of a consumer contract is void if: (a)

the term is unfair; and

(b)

the contract is a standard form contract.

The contract continues to bind the parties if it is capable of operating without the unfair term.

24 Meaning of unfair (1)

(2)

A term of a consumer contract is unfair if: (a)

it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and

(b)

it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and

(c)

it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

In determining whether a term of a consumer contract is unfair under subsection (1), a court may take into account such matters as it thinks relevant, but must take into account the following: (a)

the extent to which the term is transparent;

(b)

the contract as a whole.

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Therefore, if the Competition and Consumer Act 2010 (Cth) applies to a particular contract, any exclusion clause that would otherwise effectively prevent a consumer from relying on a statutory implied term will be void.

THE OPERATION OF THE CONTRACT Principles [2.720] The doctrine of privity of contract (exclusion of outsiders) provides that only the parties to a contract may assume rights or incur liabilities under it, ie, sue or be sued under the agreement: Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107. The parties to a contract are those persons who have provided consideration for the agreement to be enforced and in this respect the doctrine of privity is nothing more than an extension of the doctrine of consideration. Persons who are not parties to the contract cannot enforce it: Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460. Note, however, that there are some limited exceptions to this rule; it is possible in some instances for an outsider in particular contracts to enforce certain rights and obligations under the contract. Under insurance law and property law, there are some statutory exceptions which allow a third party (an outsider) to sue, eg, consumer protection legislation allows a consumer to take action against a manufacturer under the Competition and Consumer Act 2010 (Cth). Each State similarly has compulsory third party insurance for drivers so that an outsider can sue under insurance even though they are not a party to that driver’s contract. The main exception to the general law of the privity doctrine is the “insurance exception”. There are, however, some other situations where the doctrine of privity does not apply. These are called “apparent” exceptions to the doctrine because they rely on someone substituting for another person in a contract situation. The exceptions to the rule are discussed below.

Privity of contract Real exception Insurance exception [2.730] One real general law exception to the privity doctrine exists in relation to contracts of insurance — the “insurance exception”. This exception provides that where an insurer has, as part of an insurance contract, promised to confer a benefit on a third party (eg, by indemnifying a third party against certain losses), that third party may sue to enforce the contract against the insurance company notwithstanding that the party gave no consideration for that promise:

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Case study Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107

[2.731] A public liability insurance contract between the insurer and the insured (a building company) provided that cover extended not only to the insured but to certain independent contractors. When an independent contractor sought to enforce the contract against the insurer, the insurer claimed that the contractor had no standing to sue because it was not a party to the contract between the insurer and the insured (since it had provided no consideration for the insurer's promise to indemnify it). It was held that the independent contractor did have standing to sue, owing to an exception to the privity doctrine in cases of insurance.

[2.735] The case established that where a contract is made for the benefit of a third party and consideration paid to the promisor then the third party has a right to enforce the benefit of the promise. Different judges in this case gave different opinions so it is not settled law, nor necessarily applicable in all other situations. Figure 2.10: Contract between insurer and insured

The Insurance Contracts Act 1984 (Cth), s 48 now removes the doctrine of privity with respect to insurance contracts so that there is no need to rely on the general law exception established in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107. A person who is not a party to a contract, but who is referred to in the contract, specifically named or stated indirectly, has a right to recover their losses from the insurer.

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Apparent exceptions [2.740] The following exceptions to the privity doctrine in fact avoid the application of the doctrine altogether by deeming a person other than the one who physically entered the contract to be a party to the agreement. As such, these are not true exceptions to the doctrine.

Trust exception [2.750] The “trust exception” provides that it is the beneficiary who is the party to the contract rather than the trustee personally: see Chapter 29 (Davenport). Applying the doctrine of privity, it is the beneficiary, rather than the trustee, who can sue and be sued on the agreement: Vandepitte v Preferred Accident Insurance Corporation of New York [1933] AC 70 where the contracting party was effectively a trustee for the third party of the rights given under the contract. This can be difficult to prove since the existence of a trust relationship must be clearly shown or demonstrated and will not be concluded just from general words. Examples of persons in trustee–beneficiary relationships include: • solicitor (trustee)–client (beneficiary); • executor (trustee)–beneficiary under a will (beneficiary); and • fund manager (trustee)–unit holder (beneficiary).

Agency exception [2.760] The “agency exception”, like the “trust exception”, provides that where an agent enters a contract on behalf of a principal, it is the principal who is the party to the contract rather than the agent. The agent enters the contract on behalf of the principal: see Topic 7. Applying the doctrine of privity, it is the principal who may sue or be sued on the contract, not the agent. Case study Beswick v Beswick [1968] AC 58

[2.765] This case shows an exception to the rule of privity where it is established that a contracting party entered into a contract as an agent of the third party (so effectively the third party is part of the contract).

Examples of persons in agency relationships include: • managing director (agent)–company (principal); • certain employees (agents)–company (principal); • partner in a law/accounting firm (agent)–all other partners in the firm (principals); and • insurance broker (agent)–insurance company (principal).

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Figure 2.11: Trust and agency exceptions

Other apparent exceptions [2.770] Since the privity doctrine can work great injustice where a contract is designed to confer a benefit on a third party, various statutory provisions have abrogated the operation of the rule. For example, consumer protection legislation now provides that, notwithstanding that a consumer may only have a contract with a retailer, he or she may have legal rights against the wholesaler, manufacturer or importer in respect of a defective product: see Chapter 17 (Davenport). Additionally, all States have legislation which allows a third party to enforce in their own name interests in land or property created in any instrument (written document). Legislation provides third parties with a statutory right to enforce a promise made for their benefit against the promisor upon “adoption” or “acceptance” of that promise by the third party within a reasonable time after the making of the contract. Where the promisor gives valuable consideration (moving from the promisor to the promisee) for a benefit to a third party (the beneficiary), the beneficiary may enforce the promise in their own name. See various pieces of State legislation: Queensland: Property Law Act 1974 (Qld), s 55; Western Australia: Property Law Act 1969 (WA), s 13; Northern Territory: Law of Property Act (NT), s 56; and Victoria: Property Law Act 1958 (Vic), s 56(1).

Liability for inducing breach of contract [2.780] The tort of inducing breach of contract provides that a person, A, who knowingly and intentionally induces another, B, to break a contract (breach existing obligations) with another, C, without justification is liable to compensate C for any loss that may flow from that breach:

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Case study Lumley v Gye (1853) 2 El & Bl 216; 118 ER 749

[2.781] X, a singer, agreed to perform exclusively for Lumley for three months. Gye induced X to breach her contract with Lumley. It was held that Lumley was entitled to an injunction to stop X singing elsewhere as well as damages against Gye for interference in the contract with X.

Case study Greig v Insole [1978] 1 WLR 302

[2.782] The International Cricket Conference (ICC) altered its rules governing cricketers' qualifications to play in “official” Test matches, effectively preventing players who played in the World Series Cricket Pty Ltd (WSC) matches from being eligible. The English Test and County Cricket Board (TCCB) also proposed to change its rules so that such cricketers would be unable to play in county matches. It was held that such alteration (and intended alteration) of the rules directly interfered with the contracts between the cricketers concerned and WSC and had been done with the intention to force the cricketers to withdraw from their WSC contracts. As sufficient justification couldn't be shown, the ICC and TCCB had committed the tort of inducing a breach of contract.

To have a defence a party must establish that they have some justification, and this is usually difficult to prove as shown in: Case study Zhu v Treasurer (NSW) (2004) 218 CLR 530

[2.785] Z had an agency agreement with TOC and was to sell memberships in an “Olympic Club”. The Organising Committee induced TOC to break its contract with Z, which the committee claimed was justified on the grounds of protecting intellectual property rights attached to the Olympics, and further that Z had used these without authorisation. The High Court found that to justify an inducement of a breach of contract the defendant must demonstrate they were protecting a superior legal right (a proprietorial right), one that is conferred by statute. The court decided that the committee had acted more harshly than was reasonably necessary to protect its rights and there were alternative methods that could have been used.

Assignment of contracts [2.790] An assignment is the process whereby the original contracting party assigns (transfers) their rights and liabilities to another party (the assignee), who is then both bound by the terms of the agreement, but can in turn enforce the agreement. The doctrine of privity of contract poses problems for those wishing to transfer their rights or obligations under a contract to a new party for a price. For instance: 106 [2.781]

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• where a shareholder wishes to sell her or his shares, ie, to transfer shares with an unpaid amount, the assignee receives the liability to pay any calls but also gains the benefit of the payment of dividends; • where a tenant wishes to transfer her or his rights and obligations under a lease agreement to a new tenant; or • where a creditor wishes to sell her or his book debts to another. Contracts for personal services (eg, artist and client), are not assignable.

Assignment of liabilities [2.800] As a general rule, a person liable under a contract cannot transfer their liabilities to another person without the consent of the other person and the “transferee”. Exceptions exist in the Corporations Act 2001 (Cth) as regards the holder of shares in a limited company and by novation. Novation requires the consent of all parties to the agreement to rescind the original contract and enter a new contract on the same terms between the remaining parties to the agreement and the new party. The consideration for the new contract was the mutual discharge by the parties of the obligations under the old contract. The new contract may contain the same or different parties.

Assignment of rights [2.810] Debts and other choses in action are assignable by statute in all Australian jurisdictions: Property Law Act 1958 (Vic), s 134; Conveyancing Act 1919 (NSW), s 12; Property Law Act 1974 (Qld), s 199; Property Law Act 1969 (WA), s 20; Law of Property Act 1936 (SA), s 20; Conveyancing and Law of Property Act 1884 (Tas), s 86. These allow for an assignment of debts or other choses in action against a debtor by the assignee as long as: • the assignment is complete and not just a claim or charge on the property; • the assignment is expressed in writing; and • notice in writing is given to the debtor. Note that the assignee receives a title to the rights subject to equity, ie, they cannot get a better title or claim than the assignor, and further that some types of rights require specific procedures to assign, for instance particular types of insurance, shares and negotiable instruments.

Assignments in equity [2.820] Equity provided that rights (but not liabilities) under a contract may be assigned where the proposed assignor indicates a clear intention to divest himself or herself of the contractual rights, and (in most cases) the assignee provided consideration for the rights so assigned. An assignment in equity occurs under different rules from assignment under the common law. Assignments in equity take two forms: [2.820] 107

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• legal chose in action, which is a right of action that can be enforced in a court of law (eg, recovery of a debt under a contract); and • equitable chose in action, which is a right of action that can only be enforced in a court of equity (eg, an interest in a trust). Notice is not necessary to complete the assignee’s equitable right as against the original creditor, but the claims of competing assignees rank according to the date on which notice has been given to the debtor. Further, the assignee takes these rights “subject to equities”. This means that the assignee cannot obtain better title to the rights assigned than the assignor had.

Assignment by operation of law [2.830] Assignment can take place by operation of law, including: • death, where the liabilities of a deceased person under contract pass on to the executors or administrators, but only to the extent of the assets of the deceased person. In the case of a joint promise, only the survivors are liable; the estate passes to their executor or administrator on a grant of probate or letters of administration and rights under any contract also pass to the administrators. Similarly, their liabilities devolve to the administrators, though contracts requiring skill and judgment do not continue but cease. If the deceased person was in a partnership or some other form of joint and several liability, then the remaining parties assume the benefits and liabilities. Personal services contracts will not normally be assigned, unless they are capable of assignment; and • bankruptcy: see Chapter 31 (Davenport). The estate passes to the Official Trustee in Bankruptcy unless and until a registered trustee is appointed, in which event the bankrupt’s estate will vest in the registered trustee.

Revision questions 1

Raymond offered to sell his computer to William for $500, stating that he would keep the offer open for 3 days. The following day Raymond telephoned William and stated that he was withdrawing the offer because he had received an offer of $550 from George. William said that Raymond had “no right” to withdraw the offer to sell for $500 and promptly accepted. Advise Raymond.

2

An elderly couple who lived by themselves in a large house asked their niece and her husband to come and live with them and promised that, if they did so, they would leave the house to the niece when they died. The niece and her husband subsequently sold their home and went to live with the elderly couple. After a while disputes broke out between the couples and the niece and her husband left. They claimed damages for breach of contract by the elderly couple. Do you think they would succeed in their claim?

3

Jane misplaced her laptop while at work. She placed a reward notice on the staff notice board and the following day one of her colleagues,

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Moira, returned the computer. Moira was not aware of the reward notice. Overjoyed at the return of the laptop, Jane agreed to pay Moira the full amount of the reward. Subsequently she purported to “retract her promise”. Is Moira entitled to receive the reward offered? 4

John, who is 17 years of age, ordered a TummyTrimmer from a mail-order marketing company after seeing a television commercial for the device. John paid by cheque but the cheque bounced owing to insufficient funds in his bank account. Can the supplier sue John for breach of contract? (Depending on where you live, apply the common law, New South Wales law and South Australian law.)

5

The plaintiffs recently purchased a café from the defendants. The purchase price included a high percentage of goodwill built up by many years of personal service by the defendants. Within two months of the sale the defendants set up a competing café across the street. Advise the plaintiffs as to whether they can sue the defendants for breach of contract. There was no express “non-compete” clause in the sale agreement.

6

Janine ordered a pre-paid sofa from a furniture manufacturer. The sofa that was delivered did not correspond with the description of the sofa Janine had ordered (it was a 3-seater rather than a 2-seater and would not fit in Janine’s lounge room). Janine’s husband sought to return the sofa and obtain a refund. Advise him as to his legal rights, assuming Janine is entitled to a refund.

[2.830] 109

TOPIC 3 Contracts: Validity and Ending Consent of parties: Mistake, misrepresentation and unconscionable contracts .................................................................................... The legality of a contract ................................................................... Ending a contract............................................................................. Remedies and restitution ...................................................................

[3.10] [3.260] [3.390] [3.600]

Extract from Davenport S and Parker D, Business and Law in Australia (Lawbook Co., 2015), Chapters 7–8, 11 and 12.

CONSENT OF PARTIES: MISTAKE, MISREPRESENTATION AND UNCONSCIONABLE CONTRACTS Terminology Some of the key terms that are used in this Topic include: • Breach: where one party to the contract does not perform their obligations in accordance with the terms of the contract. • Champerty: the maintaining of a legal action on the understanding that the party supporting the suit will receive some share of the benefits as a result of the proceedings. • Condition: – a term of the contract that is of basic importance, breach of which gives rise to a right by the innocent party to either treat the contract as at an end or, if they do not wish to treat the contract as ended, to sue for damages. – an essential and fundamental term of the contract, the breach of which gives rise to a right by the innocent party to terminate if they should so choose. • Condition precedent: – a condition which delays the formation, existence, performance or even the enforceability of a contract until that condition occurs. – a term that goes either to the formation or existence of a contract, or to the performance of a party’s obligations under a contract. • Condition subsequent: • a condition, being a future event which the parties agree will bring the contract to an end if it occurs. Contrast with a condition precedent. • a term in the contract which automatically terminates the contract (or that part of the contract to which the term applies) on the happening of a certain event after the contract has been made. 111

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• Damages: monetary compensation and the basic common law remedy for breach of contract. • Duress: the use of threats or violence against a person, their goods or economic interests, to force them to enter into a contract against their will. • Exemplary damages: a dollar amount awarded by the court to punish the party in default. Exemplary damages are awarded only in exceptional cases. • Frustration: an unforeseen event that was not contemplated by the parties at the time of entering into the contract, which when the frustrating event occurs discharges the parties from any future obligations under the contract. • Goodwill: the benefit a business has in its connection with its customers. It is an asset and is based on the idea that customers of a business will continue to deal with the business after it is sold. • Injunction: a “stop order”, a discretionary equitable remedy which will only be granted where damages do not provide an adequate remedy. It is an order of the court restraining a person from doing something. • In pari dilecto: there is unequal blame between the parties, one party is more blameworthy. • Intermediate or innominate term: a term in a contract that is somewhere between a conditon and a warranty and which may operate as either a condition or warranty, depending on the gravity of the breach. • Limitation of actions: a statutory time limit during which certain legal proceedings must be taken to enforce a right, after which no action is permitted unless under exceptional circumstances. • Liquidated damages: a predetermined amount or formula in the contract, to be paid by a defaulting party on a breach of contract. • Misrepresentation: a representation which conveys a false or wrong impression and thus makes a contract voidable. • Mitigation: if a breach of contract occurs and results in expenses and losses to a party, the other side, in order to claim damages, must take steps to minimise their loss, otherwise a court may reduce the damages to be claimed. • Nominal damages: a nominal or small amount awarded to recognise the infringement of a legal right, usually when there has been no real damage done to the plaintiff. • Ordinary damages: the dollar amount P may recover as a result of the breach. • Penalty: if the liquidated damages prescribed in a contract exceeds actual losses, it may be disallowed as a penalty rather than appropriate compensation. • Quantum (of damage): the amount of damages P may recover for the breach. 112

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• Quantum meruit: “as much as he has earned” and means that a party prevented from fulfilling their obligations can be paid for the proportion of work they have done. • Rectification: an equitable remedy ordering the correction of a contract to accord with the intention of the parties where the parties have agreed on the terms of their contract but written them down incorrectly. • Restraint of trade: contractual interference with an individual’s ability to exercise their business, trade or profession with other persons not parties to the contract. • Remoteness: in the context of contract law, the loss suffered by the injured party is only compensable if it was within the reasonable contemplation of the parties as a likely result of breach (ie, not too far removed from the wrongful act so as to be regarded by the courts as too remote). • Restitution: based on unjust enrichment, and is imposed independently of contract, involving either the return of money or a claim of “reasonable remuneration” to P. • Severance: to distinguish, or “read down” a particular clause so that those parts of the contract that are legal can still be enforced. • Specific performance: a discretionary equitable remedy which will only be granted where damages do not provide an adequate remedy. It is an order of the court requiring a party to perform their obligations. • Supervening event: an unexpected or unforeseen event. • Unconscionable: where a party when making an agreement has acted against good conscience, or in a manner not acceptable to society, then a court may refuse to enforce such an agreement. • Undue influence: improper use of a position of influence or power possessed by one person over another to induce the latter to act for the former’s benefit. • Unliquidated damages: no amount is mentioned in the contract that a defaulting party will pay in the event of a breach, with the amount left to the courts to determine. • Vendor: the person selling a business. • Void: of no legal effect and cannot be enforced or relied upon. • Voidable: the contract has a legal defect whereby it is enforceable only by one party. • Void ab initio: void from the beginning, there was never a valid agreement. • Warranty: a term of the contract which is subsidiary (of lesser importance) to the main purpose of the contract and which confers on the innocent party only a right to sue for damages.

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Principles [3.10] Where consent to a contract has been procured by mistake, misrepresentation or other unfair conduct, the innocent party may be able to avoid the agreement and/or defend an action for enforcement of the contract. Courts are reluctant to interfere with agreements made by parties, and will require good reasons as to why a contract should be voided. This Topic examines these arguments and when they are likely to succeed in practice.

Mistake [3.20] Very few pre-contractual mistakes will make a contract void. Those that do are called operative mistakes. Generally, to be operative, the mistake must have been so serious that it influenced the mistaken party’s consent to the agreement. To determine whether a particular mistake is operative it is necessary to determine (i) the type of mistake involved and (ii) whether the particular mistake is sufficiently serious.

Type of mistake [3.30] There are three types of mistake: 1.

common mistake;

2.

mutual mistake; and

3.

unilateral mistake.

Operative mistakes Common mistake [3.40] A common mistake is where both parties hold the same mistaken belief which is essential for the existence of a binding contract. If the fact does not exist, then neither can the contract: Case study Scott v Coulson [1903] 1 Ch 249

[3.41] A contract for the assignment of a life insurance policy was made on the assumption of both parties that the assured was alive. The assured had died before the assignment was made. It was held that the contract could not be enforced as there was a common mistake (ie, both parties wrongly believed the subject matter was in existence).

Common mistake is limited to situations involving the existence or identity of the subject matter of the agreement: Case study [3.42] Leaf v International Galleries [1950] 2 KB 86.

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The parties entered into a contract for the sale of a painting on the basis of an erroneous common assumption as to the identity of the artist. It was held that the mistake was not operative since the mistake was not as to the existence of the subject matter (because the painting did exist); it was merely one as to the quality of the subject matter (because it was painted by a lesser-known artist). Nor was the mistake so serious as to go to the root of the contract in the circumstances.

The parties will not have contracted on the basis of an assumption as to the existence of a particular fact if one party to the agreement promised that the particular fact existed: Case study McRae v Commonwealth Disposals Commission (1951) 84 CLR 377

[3.45] The Commonwealth Disposals Commission (CDC) attempted to defend an action for damages for breach of contract on the basis that the agreement was void for common mistake. The CDC argued that both parties contracted on the basis of an erroneous assumption that the wreck existed and that the mistake was operative since it concerned the existence of the subject matter of the contract. It was held that there was a contract between the parties and it was based on the fact that the CDC had promised that the wreck had existed.

Mutual mistake [3.50] A mutual mistake is where both parties to an agreement are mistaken as to different facts; such mutual mistakes will void the agreement where a reasonable person could not attribute any clear and definite agreement between the parties: Case study Raffles v Wichelhaus (1864) 2 H & C 906; 159 ER 375

[3.55] The parties made an agreement regarding a ship by the name Peerless, which was to undertake a voyage from Bombay to London. It transpired that there were two ships by that name making that voyage, albeit at different times. The court held that a reasonable person could not infer a contract because they would be unable to determine which ship the parties agreed to carry out the voyage.

The courts apply an objective test to the conduct of the parties and if a reasonable person could discern such an agreement between the parties, the mistake would not be operative and the contract would remain valid.

[3.55] 115

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Unilateral mistake [3.60] A unilateral mistake is one made by a single party, and this will not usually void a contract, unless the other party knew, or suspected, or contributed to that mistaken belief.

Mistake as to identity [3.70] A unilateral mistake as to the identity of the other party to the agreement may result in a voidable contract where the other party misrepresents their identity, eg, the offer was specifically addressed to a particular party, or if the offeror specifically confirmed another’s identity: Case study Cundy v Lindsay (1877-78) LR 3 App Cas 459

[3.71] A con artist wrote to a manufacturer offering to purchase goods. He signed the letter in such a way to appear that he represented a well-known firm, Blenkiron & Co. The manufacturer, Lindsay, wrote back to the firm but at the address given by the con artist and subsequently delivered goods to that address. The con artist then sold the goods to Cundy. It was held that the contract between Lindsay and the con artist was void and therefore Cundy could get no title to the goods. Lindsay was able to show that he intended to deal with a third party (ie, Blenkiron & Co and not the imposter).

Case study Boulton v Jones (1857) 2 H & N 564; 157 ER 232

[3.72] Jones had always dealt with Brocklehurst whose business, unknown to Jones, was taken over by Boulton. Boulton, who knew that Jones intended to deal with Brocklehurst, supplied goods without telling Jones of the change of ownership. It was held that there was no contract as Jones had no intention of dealing with Boulton; but note that Jones was only successful because he could show that he had a set-off against Brocklehurst which was not available against Boulton.

Evidence to the contrary might include the fact that the plaintiff did not seek to confirm the identity of the other party, that the identity of the other party was unimportant to the plaintiff, that the offer was merely addressed to the person physically present, or that the mistake related to the other party’s attributes rather than his or her identity: Case study Phillips v Brooks [1919] 2 KB 243

[3.73] A con artist pretended to be a well-known businessman when visiting a jeweller. The jeweller allowed him to take some jewellery away after the con artist signed a cheque and gave his address as that of the businessman he was impersonating. It was held that the contract was made with the person 116 [3.60]

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physically present in the shop and was therefore voidable for fraudulent misrepresentation but not void for mistake. The third party derived good title.

Case study Lewis v Averay [1972] 1 QB 198

[3.74] Lewis sold his car to a con artist in the belief that he was a well-known actor. While he asked for, and was shown, proof of identity in the form of a special pass of admission, it was held that Lewis had intended to deal with the person in front of him, whoever he might be. Therefore the contract was voidable for fraudulent misrepresentation and the third party, Averay, acquired good title.

Case study Papas v Bianca Investments Pty Ltd (2002) 82 SASR 581

[3.75] The plaintiff sold a car to a rogue using a false identity. The rogue paid for the car with a bank cheque which was subsequently dishonoured. The rogue then obtained a loan from the defendant using the car as security. It was held that the contract between the plaintiff and the rogue was voidable since the identity of the purchaser was irrelevant to the plaintiff and as the plaintiff did not rescind before the defendant acquired an interest in the car, the plaintiff lost his right to recover the vehicle.

In each case the effect of the misrepresentation was to make the contract voidable (ie, valid and binding unless and until it was repudiated). As the mistaken party did not attempt to set aside the contract before a third party in good faith became involved, they lost the right to rescind as the third party had obtained good title. If they had acted before the third party became involved, the contract would have been void and the third party would not have acquired any rights under it. A mistake as to identity will not be relevant where the other party’s identity is not relevant to the substance of the agreement.

A mistake as to a term [3.80] A mistake as to the terms on which the contract is offered, where that mistake is known to the other party, can void the contract: Case study Smith v Hughes (1871) LR 6 QB 597 [3.81] A had new oats to sell but B believed he was buying old oats. On finding the error, B refused to accept them. The contract did not state whether the oats were to be old or new. It was held that B was liable on the contract. For the contract to be declared void, B would have had to have shown that he [3.81] 117

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intended to buy old oats and that he thought that A was selling old oats, as well as proving that A knew B wanted to buy old oats and that B thought A's offer was to sell old oats.

A unilateral mistake as to a term of the agreement will only be operative where that term was a fundamental one. Where the unilateral mistake relates to the actual terms of a written contract, the mistaken party cannot rely on their own mistake to say the contract is void from the beginning. The contract will be treated by the courts as voidable unless and until it is set aside in equity: Case study Taylor v Johnson (1983) 151 CLR 422

[3.85] While both the option and sale agreements stipulated a purchase price of $15,000, the vendor believed that the price was per acre, or $150,000. It was held that as the purchaser knew the vendor was acting under a serious mistake about the terms (the price) or the subject matter (its value), the contract was voidable in equity and could be set aside as the defendant had not materially altered his position and no third parties were involved.

As to the nature of the document [3.90] A unilateral mistake as to the nature of the document signed will only be operative where the document was fundamentally and radically different in character from that which the plaintiff believed he or she was signing. In Shogun Finance Ltd v Hudson [2002] QB 834, a fraudster bought a car under hire-purchase by using a false licence; a court found this to be a void contract since the true licence holder did not sign the contract and no property passed. Case study Saunders v Anglia Building Society [1971] AC 1004

[3.91] The plaintiff, a 78-year-old widow, signed a document which her nephew's business partner had told her was a gift of her home to her nephew, but was in fact a deed of assignment to the business partner, who mortgaged the house to pay his own debts and then defaulted on the mortgage. The building society sought to obtain possession of the house. It was held that there was no radical difference between what she signed and what she thought she was signing as both involved transfers (although the transferees were different), so her plea of non est factum failed.

• the plaintiff is within the class of persons to whom the defence of non est factum is available (eg, unable to read owing to blindness or illiteracy and who must rely on others for advice as to what they are signing, and those who through no fault of their own are unable to understand the meaning of a particular document); and 118 [3.85]

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• the plaintiff was not careless or negligent in failing to take reasonable precautions to ascertain the character of the document before signing it (for instance, by failing to read the agreement): Case study Petelin v Cullen (1975) 132 CLR 355

[3.92] Cullen sought specific performance of an option signed by Petelin in consideration of an option to purchase land. Petelin, who was illiterate, relied on non est factum, arguing that he believed that the option in favour of Cullen was a receipt. It was held that Petelin's actions had not disclosed any carelessness on his part. He had been misled by Cullen, who knew that Petelin was illiterate and, as there was a radical difference between what he signed (an extension of the option) and what he thought he was signing (a receipt), the defence succeeded.

Effect of operative mistakes [3.95] With the exception of a unilateral mistake as to a term of the agreement, the effect of an operative mistake is that the contract is rendered void and the consequences are as follows. • Neither party can enforce the agreement. • If the contract has yet to be performed, either party may rescind the agreement. • If the agreement has been performed, either party may recover any money paid or property transferred pursuant to the agreement (based on the law of restitution, and/or the tort of conversion). This is notwithstanding that the property transferred may have been on-sold to an innocent third party (as is often the case in unilateral mistake as to identity cases). The equitable remedy of rectification may be available to correct an unintentional mistake in the wording of the agreement — for instance the price of property sold — so as to “correct” the mistake and allow the parties to continue the agreement, but it must be clearly shown that the written contract does not embody the final intention of the parties: Case study Commerce Consolidated Pty Ltd v Johnstone [1976] VR 724

[3.96] A term in a written contract for the sale of land provided that the purchaser should pay interest on the balance of the purchase price from 1 May 1975. However, it was established on the facts that the common intention of the parties was that interest was meant to be calculated from 1 May 1974, the date when the purchaser took possession. It was held that as the wrong date had been inserted by mistake, the contract could be rectified by insertion of the correct date (ie, 1974).

[3.96] 119

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But note: Case study Pukallus v Cameron (1982) 180 CLR 447

[3.97] Both parties believed that land bought by the purchaser contained a bore and some 27 acres of cultivated land. After the contract was settled, it was discovered that this was not the case and the purchaser sought rectification. It was held that rectification should not be granted as the purchaser could not provide convincing proof that the written contract did not demonstrate the final intention of the parties. In this case the term proposed was clearly inconsistent with the terms of the contract.

Where the mistake is a unilateral mistake as to a term of the agreement, the agreement may be voidable. In such a case a court may, on the application of the innocent party, set the agreement aside, so that the innocent party will be able to defend an action to enforce the agreement.

Mistakes of law [3.100] A person who makes a payment under a mistake of law may be able to recover that payment by restitution: Case study David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353

[3.105] The appellants entered into an agreement with the Commonwealth Bank in 1984 for a foreign currency loan. Part of the agreement provided that the appellants were to pay the bank in respect of its withholding tax liability. One of the issues before the court was whether the appellants could recover tax paid after the Full Court of the Federal Court held that the payment of the withholding tax was void under the Income Tax Assessment Act 1936 (Cth). It was held that a person who makes a payment under a mistake of law may be able to recover that payment by restitution if the mistake was the cause of the payment.

Misrepresentation [3.110] A misrepresentation is: • a false statement of fact (as opposed to mere sales “puff”, a statement of future intent, a statement of opinion as to a fact or a term of a contract); • a partial statement of fact (past or present) such that what is omitted renders what is stated absolutely false; or • a statement of fact that was true when uttered, but which subsequently became false before the contract was concluded. The party making the statement intended the misrepresentation to induce another into a contract. 120 [3.97]

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Puff or puffery can be difficult to distinguish from a factual statement, eg, in Mitchell v Valherie (2005) 93 SASR 76, a court considered comments on the sale of a house, ie, “Cosy - Immaculate style, Nothing to Spend”, were held to be puff and even if a fact, not important enough in the context of all facts to indicate misrepresentation. A statement of intention, similarly to an opinion, is not considered misrepresentation unless it is a statement designed to misrepresent a fact. Similarly, a statement of the law may be misrepresentation if it is wrong and designed to misrepresent a fact, and induces a person to act on that statement, eg, a statement that land was not subject to zoning rules, when in fact it was: Public Trustee v Taylor [1978] VR 289. Mere silence cannot constitute a misrepresentation. However, a misrepresentation may be made by words or conduct (such as a nod), or where silence distorts a positive representation, eg, that a tenant is subject to some undisclosed agreement on the sale of occupied property: Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563. Note that most contracts contain a clause stating that liability for any representations made in connection with the agreement is excluded. Such clauses will not affect the ability of a party to rely on the law of misrepresentation since all that is needed to prove an actionable misrepresentation are the elements set out at [3.120]. An agreement based on misrepresentation is voidable and if possible the contract can be rescinded.

Fraudulent misrepresentation [3.120] Fraudulent misrepresentation (the tort of deceit) involves intentional deceit by one party that affects the other. To establish the action, a plaintiff must be able to establish the presence of each of the following elements: • there is a statement of fact; and • that statement of fact is false (falsity being a question of fact); and • the representor knows that statement of fact to be false, or has no belief in its truth, or makes the statement recklessly whether it be true or not; and • the representor intends that the innocent party act on the statement: Case study Peek v Gurney (1873) LR 6 HL 377

[3.121] A prospectus issued to the public by the promoters of a company contained a number of misrepresentations. In reliance on the statements, the plaintiff bought shares from an original allottee. It was held that as the plaintiff was not an original allottee and the misrepresentations contained in the prospectus had not been personally addressed to him, as a third party he was not able to rely on the misrepresentation if he acted on it to his detriment.

[3.121] 121

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• and the statement in fact is acted upon (the plaintiff must establish reliance, ie, that the representation induced him or her to enter into the contract): Case study Holmes v Jones (1907) 4 CLR 1692

[3.125] The vendors offered their property for sale and made a number of false statements. The purchaser rejected the offer and later, after learning of the false statement, inspected the property and the stock and entered into a contract of sale on a totally different basis. The purchaser subsequently tried to avoid the contract on the basis of the misrepresentations first made by the vendors. It was held that the purchaser had not relied on the vendor's misrepresentations.

• and the contract results in damage to the plaintiff.

Innocent misrepresentation [3.130] An innocent misrepresentation is an incorrect statement of fact made in good faith (ie, without an intention to mislead or deceive, or made without realising its untruth): Case study Whittington v Seale-Hayne (1900) 82 LT 49

[3.135] The plaintiff leased premises from the defendant on the basis that the premises were in a sanitary condition. The defendant genuinely believed that they were sanitary but they were found to be unsanitary after the plaintiff moved in. It was held that the plaintiff was entitled to rescission, a refund of rates and an indemnity on repairs.

Negligent misrepresentation [3.140] A negligent misrepresentation arises when a person makes a statement without taking reasonable care to ensure that the statement is true, in circumstances where the maker owes the representee a duty of care: see also Chapter 28 (Davenport). Briefly, a duty to take reasonable care in the provision of information or advice will arise where: • a special relationship exists between the parties such that the person providing the information must be aware that the person seeking the advice or information trusts them to exercise a duty of care in the giving of that information; • the information or advice concerns a serious or business matter, or there is a fiduciary relationship; • the information is given in circumstances where the speaker realises, or ought to realise, that the recipient intends to act upon it; 122 [3.125]

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• it is reasonable for that party to act on the information or advice so given (ie, there is reliance): Case study San Sebastian Pty Ltd v Minister Administering the Environmental Planning and Assessment Act (NSW) (1986) 162 CLR 340

[3.141] Plans for the redevelopment of an inner city area as office space were publicly exhibited by a planning authority and the plaintiff development company purchased land in reliance on the plans which were ultimately abandoned some four years later. The development company could not develop the land as it had hoped and was forced to sell it at a loss. It was held that there had been no representation by the authority that the plans were final and correct, nor was there an invitation to the developer to act on the plans.

– and the person receiving the advice suffers damage (the amount the plaintiff will recover is the amount necessary to restore the plaintiff to the position they were in before the statement was made). For instance: a lawyer will owe his or her client a duty of care in respect of legal advice, an accountant will owe his or her client a duty of care in respect of financial advice, and a doctor will owe his or her patients a duty of care in respect of medical advice. Parties engaged in pre-contractual negotiations may also owe one another a duty of care in respect of information or advice provided in the course of those negotiations: Case study Esso Petroleum Co Ltd v Mardon [1976] QB 801

[3.142] The plaintiff had leased a service station from the oil company in reliance on negligent statements made by a representative of the company as to the profitability of the service station. It was held that the company owed a duty of care to the lessee and he could receive damages for the negligent misrepresentation.

Case study Chiarabaglio v Westpac [1991] ATPR 46-067

[3.145] A customer was encouraged to borrow offshore by an employee of the bank but not adequately informed of the risks. The customer suffered losses because of the depreciation of the Australian dollar. It was held that the banker owed a duty of care to the customer “at the level of an adviser of ordinary competence and experience in foreign exchange borrowing”.

[3.145] 123

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Effect of a misrepresentation [3.150] The effect of a misrepresentation depends upon whether it was made innocently, fraudulently or negligently. Generally, rescission is only available for innocent and fraudulent representation and then only where it is possible to return the parties to their original position. Damages are only available for fraudulent and negligent misrepresentation (pursuant to the torts of deceit and negligence respectively). Therefore, it is important to ascertain the nature of the representation in order to determine what remedies may be available.

Limits on claims for misrepresentation [3.155] No action can be taken for misrepresentation where: • A statement or conduct is non-inducing and was not acted upon. • The claimant was unaware of the misrepresentation: see Peek v Gurney (1873) LR 6 HL 377. • The claimant knows the representation is untrue. • The representation was not really relevant or important as a reason for entering into the agreement.

Statutory remedies [3.160] The Australian Consumer Law (ACL) (Sch 2 to the Competition and Consumer Act 2010 (Cth)) prohibits misleading or deceptive conduct under ss 18 and 19; s 18 contains an all-encompassing principle: “A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.” This means that both corporations (which are defined as legal persons) and natural persons must not be involved in what is considered to be misleading behaviour. Section 19 applies a prohibition that information providers must not give out false and misleading statements regarding products and services. The ACL also provides remedies for consumers who are induced to enter into contracts as a result of false statements. Case study Ward v Premier Ice Skating Rink Pty Ltd [1986] ATPR 40-681

[3.161] Ward purchased a business from the defendant that had been advertised as grossing $3,000 weekly with overheads of $1,600 per week. Ward assumed that the weekly profit was accordingly $1,400, but the seller, in its reference to “overheads” intended fixed costs only, and the business was netting much less than $1,400 weekly. The court held that, although an accountant may not have been misled by these figures, anyone not versed in accountancy terms (Ward being one such individual) was likely to be misled, and the equivalent of Australian Consumer Law, s 18 at that time was accordingly applied.

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[3.165] The Misrepresentation Act 1972 (SA) and the Civil Law (Wrongs) Act 2002 (ACT) impose liability on anyone making a misrepresentation of fact. All that is required is a non-fraudulent misrepresentation, with no distinction being made whether it is fraudulent or innocent. Once a non-fraudulent misrepresentation is established, the Acts provide damages and/or rescission as remedies if that is just and equitable for the court to do so.

Duress [3.170] A contract is assumed to be entered into freely and voluntarily. Duress is any pressure (physical, psychological or economic) brought to bear on a party to a contract in order to unlawfully force that party to enter into the agreement against their will. Lawful pressure through normal business or competition is not considered duress. Unacceptable pressure consists of unlawful threats or unconscionable conduct either physically, psychologically or economically against another party which forces them into a contract, without any alternative. It is the plaintiff who has the burden of proving the duress, while the defendant can raise defences that the pressure did not underpin the contract, and that there were alternatives, even if less attractive. Threats against another party can take a number of forms, eg, threat of imprisonment, or prosecution of a relative (Public Service Employees Credit Union Co-op Ltd v Campion (1984) 75 FLR 131), similarly threats to disclose private information as blackmail might also be duress. In Mutual Finance Ltd v John Wetton & Sons Ltd [1937] 2 KB 389, a manager of a finance company threatened to prosecute a family member for forgery, in order to force other family members to act as guarantors for a contract in which there had been a forged signature; the court found this to be duress and the contract could not be enforced. Duress against goods may also occur. For example, a company who undertook maintenance on a helicopter refused to return it to its owner once the work was finished unless the owner promised to pay the money owed the company, despite the work being faulty. The company fixing the helicopter knew how desperate the owner was to retrieve their property; the court found this to be duress: Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298. That pressure may be brought to bear directly on the victim, or indirectly through the victim’s family or friends, and does not have to be the sole reason for the coerced party to enter into the contract. It only has to be one of the reasons: Case study Barton v Armstrong [1976] AC 104 [3.171] The defendant made threats against the plaintiff's life in order to force him to sign a deed. It was also established that the plaintiff would have executed the deed for business reasons but so long as the threat was one of the reasons for Barton's decision to sell, as distinct from the only reason for [3.171] 125

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the decision to sell, the threat would entitle him to avoid the contract on the grounds of duress.

The law will permit a greater level of pressure in a commercial situation where the parties are of equal bargaining power: Case study North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] 1 QB 705

[3.172] A shipbuilding company threatened to terminate a contract for the building of a tanker unless it was paid extra to cover currency devaluation. The shipowner agreed because it needed the tanker for charter work, but later sued to recover the increased payments it had been forced to make. It was held that the shipbuilder's threat to breach the contract without any legal justification unless the shipowner agreed to pay the extra amount was economic duress. The contract was voidable and moneys would normally be recoverable; however, in this case because of the delay in bringing the action the shipowner was taken to have affirmed the contract.

A plea of economic duress was upheld in the case of: Case study Universe Tankships Inc of Monrovia v International Transport Workers' Federation [1983] 1 AC 366

[3.173] The International Transport Workers' Federation demanded payment from the owners of a ship berthed in port; the union made various demands, which included the receipt of subscriptions for members, pay entitlements and a contribution to the union's benefit fund. Meanwhile the union threatened to prevent the ship from sailing until such payments were made. The owner made the payments to secure the release of its ship, but later succeeded in a claim for refund of the money based on economic duress; a court accepted that the payments were not freely made.

[3.175] Certain types of economic pressure, while traditionally deemed not to constitute duress, might now be accepted by a court as either duress or unconscionable conduct, since there is a nexus between these two types of offensive conduct. For example, the High Court found in the case of Smith v William Charlick Ltd (1924) 34 CLR 38 that a supplier’s threat not to deal with a customer, while a form of commercial pressure, was not sufficient to constitute duress, even though that supplier held a monopoly over the supply of the goods. Such conduct might today offend the Australian Consumer Law or be considered unconscionable conduct under the common law. Note, finally, that a person alleging the application of duress must act promptly and exercise their right to avoid the resulting contract within a reasonable time. 126 [3.172]

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Effect of duress [3.180] A contract procured by duress is voidable at the option of the victim. This means that the victim may resist an action for specific performance and/or seek rescission. However, a court may not grant rescission if third party rights have intervened, if the victim has been slow in seeking relief, or where the victim has ratified the agreement (as in North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] 1 QB 705).

Undue Influence Definition [3.190] Undue influence occurs when a person abuses a position of trust and confidence to coerce another to enter into a contract or make a gift that is manifestly disadvantageous to that other party; undue influence is a breach of fairness, a part of equitable law. Like duress, undue influence may be found on the weight of evidence put before the court (this is referred to as “actual undue influence” in the instance of no special relationship existing). Undue influence can occur in contract situations, and also in the making of gifts and bequests under a will. A successful plea of undue influence may occur if it can be shown that the pressure applied to the weaker party is such that their consent to the proposal was not freely and voluntarily given. A very important distinction needs to be made between cases where a special relationship exists and cases where it does not exist. If the parties are in a special relationship, the law will presume that the stronger party has unduly influenced the weaker party, even if no pressure was exerted; it is sufficient to demonstrate that “taking advantage” is undue influence, irrespective of whether a party actually sought an advantage. The effect of this presumption being activated is that it results in the onus being placed upon the stronger party to rebut the presumption that they unduly influenced the weaker party. If a contract is made between two people in a special relationship and a plea of undue influence is made by the weaker party, the resulting contract will be set aside for undue influence, unless the dominant party can satisfy the court that they did not unduly influence the weaker party. In practice this can be avoided by ensuring that the weaker party receives appropriate independent professional advice as to their rights before entering into the contract. A rebuttal of undue influence is where free decision-making was evident (free will) and/or appropriate independent advice was provided to the party claiming undue influence. In cases where there is no special relationship between the parties, a contract can still be set aside for undue influence if the weaker party can show that their judgment was adversely affected by influence unduly exerted by the other party. There is little difference between undue influence in this context and economic duress discussed at [3.170]. Note, if there is no special [3.190] 127

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relationship, the onus of proving undue influence lies upon the party alleging it, which was demonstrated in the case of: Case study Mutual Finance Ltd v John Wetton & Sons Ltd [1937] 2 KB 389

[3.191] The defendant company signed a document of guarantee under a threat; if it did not sign it, then a member of the family would be prosecuted for a criminal offence. When the plaintiff tried to enforce the guarantee, the court held that it could not be enforced, being voidable on the ground of undue influence. The threatened party only signed the contract (of guarantee) to prevent prosecution, and the plaintiff was aware of that fact. Note that such conduct would now be prohibited under the ACL and the Fair Trading Acts.

[3.192] The majority of cases concerning undue influence arise in the context of a special relationship, where the presumption of undue influence applies, requiring the stronger party to satisfy the court that undue influence has not been applied, ie, to rebut the presumption. Rebuttal is possible where it can be proved that the individual was able to make appropriate decisions, or that they had received independent advice. Advice received from a solicitor who works for both parties is not sufficient to rebut a presumption, eg, advice to a step-mother and step-daughter by a lawyer, who works for both parties, the step-daughter being only 21 years of age: Powell v Powell [1900] 1 Ch 243. In practice, undue influence is most frequently argued in cases where a special relationship exists between the two parties who have agreed to the contract (or gift), but undue influence can also exist in the absence of a special relationship. A special relationship exists between two parties where one is in a dominant advisory position in relation to the other, and the weaker party is dependent upon the dominant party for advice and support. A special relationship exists between trustee and beneficiary, priest and religious adherent, solicitor and client, parent and child, doctor and patient, banker and customer (in some circumstances), and financial advisor and client. There are a multitude of cases dealing with religious devotees giving all their wealth to a religious group; courts may still find undue influence is present, even where no overt pressure was used: Hartigan v International Society for Krishna Consciousness Inc [2002] NSWSC 810. The situation regarding agreements by married couples has also been under the scrutiny of the courts, particularly where a wife has signed as a guarantee for a husband’s borrowing:

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Case study Yerkey v Jones (1939) 63 CLR 649

[3.193] Mrs Jones had signed a guarantee of a second mortgage over her property, which she later claimed was signed under a misunderstanding of its implications. The case went to the High Court which ultimately decided that Mrs Jones knew the nature of her obligation and was bound by it.

However, in: Case study Bank of Victoria Ltd v Mueller [1925] VLR 642

[3.195] The husband persuaded his wife to sign a guarantee in favour of the Bank of Victoria, but in so doing he misrepresented to her the true nature of her obligations under the guarantee document. The wife did not seek or obtain independent professional advice concerning the nature of her potential obligations to the bank, and the evidence was that she did not understand the nature or effect of the transaction. When she sought to discover the true nature of her obligation by inquiry to the bank, she was given no useful information. The court held that Mrs Mueller was entitled to be released from her obligations under the guarantee, as her husband had unduly influenced her and, unlike the wife in Yerkey v Jones (1939) 63 CLR 649, she did not understand the contract.

Where a special relationship is presumed to exist [3.200] In some cases, the relationship between the parties is such as to create a presumption of undue influence unless the opposite is established (ie, a special relationship is presumed to exist). Here the defendant stands in an unequal bargaining relationship to the plaintiff in a relationship of influence or confidence and such a relationship is presumed to exist in the following situations: guardian and ward; trustee and beneficiary; solicitor and client; religious adviser and devotee; doctor and patient; parent and child. Case study Johnson v Buttress (1936) 56 CLR 113

[3.201] An elderly man, widowed and illiterate, became very dependent on Buttress, leading to alienation of his own family. The man's family claimed undue influence, a claim that was successful on the grounds that the man was vulnerable and susceptible, and that Buttress had used undue influence to her own advantage.

Duress is commonly categorised into three types — duress of the person (threats of physical violence to the contracting party or close relatives), duress of goods (involving threatened damage to or unlawful retention of goods) and [3.201] 129

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economic duress (where pressure is applied by taking actual or threatened advantage resulting from the economic circumstances of the contracting party). But duress can also arise from threats to commit an unlawful act; threats not to perform an existing contract; threats to cease dealing with the victim of duress; or threats to prosecute or initiate legal proceedings against the victim. Evidence that the defendant might adduce to rebut the presumption and show that the transaction was voluntary and understood by the plaintiff may include the fact that the plaintiff entered into the contract after taking independent legal or financial advice (as applicable), or that the client was sufficiently sophisticated and could properly assess the nature of the agreement so that there could be no suggestion that advantage was taken of the confidential relationship: Case study Spong v Spong (1914) 18 CLR 544

[3.202] A father voluntarily transferred land to his son in the absence of independent advice. When he executed the transfer, the son knew that the father was incapable of understanding the contents or effect of the transfer. It was held that the evidence established the existence of a fiduciary relationship between the parties and that the transaction was the result of undue influence and should be set aside.

Case study Westmelton (Vic) Pty Ltd v Archer [1982] VR 305

[3.203] A firm of solicitors, who had a long-term relationship with the appellant, offered to reduce their fees for work done in exchange for a share in the profits of the appellant's venture. The appellant originally accepted the offer but later decided against the agreement and claimed undue influence based on the special relationship of solicitor and client. The court held that the presumption was effectively rebutted in this case because the appellant was an experienced commercial operator and there was no suggestion of impropriety on the part of the respondent.

The relationship of husband and wife does not give rise to a presumption of undue influence but in appropriate circumstances a special relationship may be established: Case study Farmers' Co-operative Executors & Trustees Ltd v Perks (1989) 52 SASR 399 [3.205] The plaintiff, an executor of the defendant's deceased wife, sought to have set aside a transfer of the wife's share in a farm, which she and her husband had jointly owned, because of undue influence (the husband eventually murdered her!). It was held that there was evidence of considerable physical and mental abuse by the defendant of his wife over the years 130 [3.202]

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(amounting to duress) and that because of this abuse the transaction should be set aside, since no rebuttal could be made out.

Where no special relationship exists [3.210] Where no special relationship is presumed to exist, the onus is on the person seeking to avoid the transaction to prove that it was the result of undue influence by the defendant: Case study Tufton v Sperni [1952] 2 TLR 516

[3.211] The plaintiff bought a house from the defendant for roughly double its true value and on terms that were grossly unfair to the plaintiff. The house was bought for the purpose of promoting Islam. The plaintiff was an ardent convert to the religion and the defendant had been originally introduced to the plaintiff to advise him on repair and reconstruction of his own premises for the religious scheme. The house the plaintiff eventually bought had been put forward as a better alternative by the defendant. It was held that the defendant, knowing that the plaintiff was unbusinesslike and credulous and felt under a moral and religious obligation in relation to the scheme, stood towards the plaintiff in a relationship of trust or confidence that placed on him an onus to ensure he gave the plaintiff the best advice he could. The defendant had abused his position and therefore the plaintiff had the sale set aside.

Case study Tate v Williamson (1866) LR 2 Ch App 55

[3.215] A university undergraduate who was in debt sought advice from Williamson, an older relative, who after discussion offered to buy Tate's interest in a plantation for £7,000. Tate accepted this offer but, before a contract was signed, Williamson discovered that the asset was worth nearly twice as much (as he had agreed to pay for it) due to exploration for and discovery of minerals on an adjacent property. Williamson did not tell Tate of the property's potential value but completed the purchase and made a quick and substantial profit from the transaction. The court held that a special relationship existed, undue influence had been applied and it ordered Williamson to account to Tate for the profit made on the transaction.

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Effect of undue influence [3.220] Generally, where undue influence can be established in the circumstances, the contract will be rendered voidable at the option of the victim. However, since relief against undue influence is equitable and discretionary, the court may decline to rescind an agreement where the plaintiff has been tardy in seeking rescission: Case study Tate v Williamson (1866) LR 2 Ch App 55

[3.225] A university undergraduate who was in debt sought advice from Williamson, an older relative, who after discussion offered to buy Tate's interest in a plantation for £7,000. Tate accepted this offer but, before a contract was signed, Williamson discovered that the asset was worth nearly twice as much (as he had agreed to pay for it) due to exploration for and discovery of minerals on an adjacent property. Williamson did not tell Tate of the property's potential value but completed the purchase and made a quick and substantial profit from the transaction. The court held that a special relationship existed, undue influence had been applied and it ordered Williamson to account to Tate for the profit made on the transaction.

Undue influence and third parties [3.230] Undue influence, like duress, may emanate from a third party. Where this is the case, the courts have held that a contract between A and B may be voidable for undue influence emanating from C where there is: • actual undue influence: B was on notice as to the actual undue influence between A and C; or • presumed undue influence: B was on notice of a possible relationship between A and C, and B cannot rebut the presumption of undue influence in the circumstances. This is often the case where a bank (B) procures a guarantee from a third party (C) who is in a relationship of trust and confidence with the borrower (A): Case study Lloyd's Bank Ltd v Bundy [1975] QB 326 [3.235] The defendant, an elderly farmer, and his son had been customers of the plaintiff bank for a number of years. The son had formed a company which banked at the same branch. The defendant guaranteed the company's overdraft with his sole remaining asset, the farm. It was held that a relationship of confidentiality existed between the bank and the defendant and that the guarantee could be set aside for undue influence. The bank had breached its fiduciary duty of care to him by not encouraging him to seek independent advice, since the effect of the guarantee and charge could have left him destitute in old age. 132 [3.220]

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Unconscionable conduct [3.240] The law of unconscionable contracts protects a party with relatively weak bargaining power from being forced into an agreement by the party in a relatively stronger bargaining position. The word unconscionable means “against good conscience” or what society would accept as proper acceptable behaviour. Thus, an agreement may be voidable where: • one party to the contract was under a special disadvantage in relation to the other; and • the other party to the contract deliberately and knowingly took unconscientious advantage (ie, they abused their superior bargaining position) of that special disability in order to procure the first party’s consent to the agreement. One party may be at a “special disadvantage” in relation to the other where that party is afflicted by: … poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary … Blomley v Ryan (1956) 99 CLR 362, where a court noted that the purchaser of a property was well aware of the vendor’s weaknesses after his habitual heavy drinking during the making of the deal.

Unconscionability occurs where the stronger party takes advantage of that perceived weakness in the contracting party. Alternatively, a defence to a claim of unconscionability is that the agreement was fair, justified and reasonable. In Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51, a court would not hold unconscionability against a landlord who insisted on a tenant giving up a legal claim in order to secure a new lease to enable the sale of their business. Despite the support of the Australian Competition and Consumer Commission (ACCC), the High Court found that the parties had freely negotiated and despite the unfavourable outcome, the agreement was not unconscionable. It also appears that a “special disadvantage” may comprise different types of knowledge depending on the circumstances: Case study Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 [3.241] An elderly Italian couple, with little understanding of English or formal education, signed a mortgage as security for payment of the debts of one of their son's companies, mistakenly believing it to be a guarantee for six months and that the company was in a good financial situation. The bank manager corrected the misunderstanding regarding the length of time the guarantee/ mortgage was to run but did nothing else other than to ensure they signed the guarantee. When the son's company went into liquidation and the bank [3.241] 133

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attempted to exercise its rights under the mortgage/guarantee, the Amadios attempted to have the contract set aside. It was held that it was unconscionable for the bank to rely on the guarantee/mortgage and it was set aside. The bank was in a superior bargaining position to the Amadios as it knew the poor financial position of the son and that the parents did not fully understand the contract they were entering into.

One party takes “unconscientious advantage” of the other party’s position where he or she takes advantage of that position in the knowledge of the plaintiff’s special disability so that the “taking advantage” in substance amounts to an abuse of bargaining position: Case study Louth v Diprose (1992) 175 CLR 621

[3.242] The respondent, a practising solicitor, became infatuated with, and emotionally dependent on, the respondent and made a gift of money to her to buy a house. It was held that the appellant had unconscientiously exploited her power over the respondent and ordered the house be transferred to him.

[3.245] A party will not have “taken advantage” of another’s special disadvantage where the other party entered into the contract of his or her own free will — for instance, after receiving independent legal advice. In the case of guarantees by married women of their husband’s debts, because of the special relationship that exists between the parties, it may be unconscionable to enforce a guarantee if the wife can show (as in Garcia v National Australia Bank Ltd (1998) 194 CLR 395): • she did not understand the effect of the transaction; • she gained no financial benefit; • that the lender understood that the wife had trust and confidence in her husband in relation to business matters and that he may not have explained to the wife the effect of the transaction; and • the lender did not take steps to explain the transaction to the wife or encourage the wife to seek independent advice.

Statutory modifications to the common law [3.250] The Australian Consumer Law widens the available remedies previously under the common law. Under s 20 a person must not in trade or commerce engage in unconscionable dealing within the meaning of the common law. Note that ss 21 and 22 prohibit unconscionable dealings with consumers and businesses respectively.

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The ACL also prohibits “False or misleading representations etc” in s 29. Under s 29 false or misleading representations about goods or services include some 24 categories of misrepresentation. Section 29(1) states: A person must not, in trade or commerce, in connection with the supply or possible supply of goods or services or in connection with the promotion by any means of the supply or use of goods or services, make improper representations as to the goods and services. This would include: • false and misleading representations as to a good’s standard, quality, value, grade, composition, style model, origin or history; • false or misleading representations as to services; • false statements that goods are new; • false statements as to testimonials, sponsorships or approvals; • false statements as to price or availability of repairs; and • false statements regarding the existence of exclusions or conditions; warranties, guarantees, rights or remedies. The ACL further lists sections dealing with particular subject matters concerning misleading behaviour, and these include: • false or misleading representations about sale of land (s 30); • misleading conduct relating to employment (s 31); • offering of rebates, gifts or prizes (s 32); • misleading conduct as to the nature of goods (s 33); • misleading conduct as to the nature of services (s 34); and • bait advertising: s 35. The ACL also applies to unfair contract terms whereby under s 23 unfair contract terms may be invalidated. It is expected that the courts will follow established case principles when deciding disputes and applying the new legislation. The ACL gives great powers to both the ACCC and the Australian Securities and Investments Commission (ACCC) to impose a range of remedies, which are set out in Ch 5. The ACL provides for a range of measures which include undertakings, orders, warnings and penalties, for instance: • the regulator may accept undertakings (s 218); • the use of substantiation notices — the regulator may require claims to be substantiated, setting standards of compliance etc (ss 219 – 222); • public warning notices may be issued (s 223); • a court may issue pecuniary penalties (and offences) (ss 224 – 225); • a court may grant injunctions (ss 232 – 235); • damages awards (s 236); and [3.250] 135

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• court-awarded compensation orders for injured persons and orders for non-party consumers: ss 237 – 239. The Contracts Review Act 1980 (NSW) empowers the New South Wales Supreme Court to grant relief in respect of “harsh, oppressive, unconscionable or unjust contracts” by refusing enforcement, declaring the contract void or varying it in whole or in part. Whatever approach the court adopts, it can take into account matters such as bargaining inequality and the use of unfair tactics, while having regard to the public interest and to all the circumstances of the case (s 9(1)): Case study SH Lock (Aust) Ltd v Kennedy (1988) 12 NSWLR 482

[3.251] Kennedy orally agreed to guarantee a loan to her son-in-law's company up to a limit of $100,000 but when she signed the written contract of guarantee it was unlimited. It was held that the contract was valid but the guarantee was fixed at the orally agreed amount of $100,000.

Where the plaintiff was in a position to understand what they were doing because, eg, they had sought independent expert advice, then relief will probably not be available because of the difficulty in establishing that it was “unjust” within the meaning of the Act: Case study West v AGC (Advances) Ltd (1986) 5 NSWLR 610

[3.255] West, a woman with limited business experience, gave a mortgage over her house to secure a loan made by AGC, a finance company, against the advice of her accountant son and a barrister friend. It was held that in the circumstances the mortgage was not “unjust” because she had entered into the agreement against the advice of her accountant son and her barrister friend.

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Table 3.1: Mistake Type of Mistake

Brief Description

Common

Same error made by both parties

Mistake Operative When … Contract made on the basis of a common assumption of fact

being: – the existence of the subject matter of the agreement; or – another fact which goes to the root of the agreement

Mutual

Unilateral

Both parties make different errors

A reasonable person could not impute any clear and definite agreement between the parties Mistake as to Only one party makes The contract was an error, and the other conditional on the identity of identity of the other party knew, or ought the other to have known, of the party corresponding party to the with the plaintiff's mistake agreement understanding Mistake as to Only one party makes Term was fundamenan error, and the other tal to the agreement term of the party knew, or ought contract to have known, of the mistake Mistake as to Only one party makes – The document an error, and the other signed was “fundanature of mentally and party knew, or ought document to have known, of the radically” different to (non est that which the mistake factum) plaintiff believed he or she was signing – the plaintiff is within the class of persons entitled to rely on the defence; and – The plaintiff was not careless in looking after her or his own interests

Effect of Mistake Contract void; rectification may be

available

Contract void

Contract void

Contract void or voidable; rectification may be available Contract void

Table 3.2: Misrepresentation Innocent Nature of Misrepresentation – Contract voidable Effect of misrepresentation

Fraudulent

Negligent

– Contract is voidable

– Contract remains valid

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Nature of Misrepresentation General law remedies

Innocent

Fraudulent

Negligent

– Affirm the agreement (continue with contract) – Rescind the agreement (end the contract and restore the status quo ante) and obtain an “indemnity” for expenses incurred pursuant to the agreement – Defend an action for specific performance

– Affirm the agreement (continue with the agreement) and sue for damages (deceit) – Rescind the contract (end the contract and restore the status quo ante) and sue for damages (deceit) – Defend an action for specific performance and sue for damages (deceit) – Same as remedies for innocent misrepresentation

– Sue for damages (negligence)

– Sue for damages Statutory (subject to certain remedies defences, including – reasonable grounds to Misrepresentation believe the representation Act 1972 (SA) was true) – Civil Law – Rescind the agreement (Wrongs) Act even if the contract has 2002 (ACT) been fully performed (rule in Seddon's Case abrogated) and even if the misrepresentation has become a term of the contract – Have “unjust” contract rewritten: Contracts Review Act 1980 (NSW)

138 [3.255]

– Same as remedies for innocent misrepresentation

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Figure 3.1: Duress

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Figure 3.2: Undue influence

140 [3.255]

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Figure 3.3: Unconscionable conduct

THE LEGALITY OF A CONTRACT Principles [3.260] Certain contracts, and certain clauses within contracts, are prohibited either by statute or at common law (because they are illegal). (For convenience this discussion refers to “contracts” only but all references to “contracts” should be taken to include “clauses within contracts”.) Where a contract is illegal, it is unenforceable and the courts will not enforce remedies for breach of contract.

Illegal and void contracts [3.270] Contracts prohibited by statute and by common law are divided into two classes: those which are “illegal” and those which are “void”. A contract to commit a crime is illegal. If the contract is void then neither party can sue, though a party may be able to get back some or all moneys paid. If the contract is illegal then parties generally cannot claim back moneys paid, ie, the defendant does not have to give back any money received. However, where a party is not “in pari delicto” ie, not equally to blame, because they were induced into the illegal contract by, eg, fraud, misrepresentation, duress or unconscionable behaviour, they may be able to claim back moneys. Where a party abuses their fiduciary relationship, courts may find it unfair for a party to retain moneys: Abdurahman v Field (1987) 8 NSWLR 158. If a party finds that they are in an illegal contract and decide not to go any further in accepting performance of the contract, they may also recover moneys. If a contract is void but not illegal, because parts of the contract are unenforceable due to a contravention of law, it may be possible to “sever” (cut [3.270] 141

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away) that part of the contract which is void, though if this changes the whole complexion of the contract, then the whole contract is void. Certain promises under the contract may be severable from the main contract if they are mere elements of the agreement, removal of which does not destroy the nature of the contract: McFarlane v Daniell (1938) 38 SR (NSW) 337. The Restraints of Trade Act 1976 (NSW) allows for a restraint of trade to the extent that it is reasonable in the interests of the public. This Act is designed to stop parties from severing parts of a contract and implementing further restraints not covered by law; under the legislation they will still be tested.

Statutory illegality [3.280] Legislation may expressly or impliedly prohibit a contract (or render it void) either from the outset (“illegal as formed”) or once performed (“illegal as performed”). Where an agreement is prohibited from the outset it will be void ab initio and where it is merely illegal once performed it will simply be void. If a contract contravenes a statute, it does not automatically make it unenforceable, though if void ab initio, eg, because it was an illegal agreement, then it is unenforceable: Fitzgerald v FJ Leohhandt Pty Ltd (1997) 189 CLR 215. The usual rules of statutory construction (discussed in Chapter 1 (Davenport) should be employed to determine whether a particular legislative provision impliedly prohibits an agreement. For example, ss 120 – 122 of the Bankruptcy Act 1966 (Cth) provides that certain contracts by an insolvent person are void against the trustee in bankruptcy, while other agreements remain valid and enforceable between the insolvent person and the other contracting party.

Contracts illegal by statute [3.290] A contract may be expressly prohibited by statute, in which case it is illegal and unenforceable: Case study Re Mahmoud & Ispahani [1921] 2 KB 716

[3.291] A statutory order provided that no one could buy, sell or otherwise deal in linseed oil without a licence. The defendant falsely told the plaintiff he had a licence and contracted to fraudulently purchase oil from him. The defendant later refused to take delivery and the plaintiff sued for breach of contract. The court held that the contract was illegal and unenforceable because it was with an unlicensed purchaser who was expressly prohibited from buying under a statutory order; the contract was absolutely prohibited on the grounds of public benefit, it was consequently illegal, unenforceable and could not be upheld by a court.

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Case study Chitts v Allaine [1982] Qd R 319

[3.292] A by-law prohibited the sale of goodwill, fixtures or fittings of flats without a certificate from the council's health surveyor being tendered to the intending buyer before entering into the contract. Where such a certificate was not given to the buyer until just before the date set for completion of the sale, it was held that failure to tender the certificate rendered the purported sale illegal and therefore void and unenforceable, illegal as performed.

[3.293] No one can sue on the contract and money paid or property transferred cannot be recovered if the claim depends on enforcing the illegality. Subsequent transactions based on the illegal transaction are also void, although action may be taken for restitution by the innocent party. Non-compliance with a statute may impliedly prohibit a contract. In such cases the courts consider what the statute was intended to achieve (eg, protecting the public or furthering some public policy objective); the statute may require or proscribe certain behaviour or conduct and provide a penalty for noncompliance. If a court decides the statute implied non-compliance as a basis for prohibition of such agreements, then the contract is illegal and unenforceable. In the case of Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410, Gibbs ACJ suggested there were four situations in which a statute may render a contract illegal, where: • the contract may require something which is forbidden by the statute; • the contract may be of a type that the statute expressly or impliedly prohibits; • the contract, though lawful prima facie, may have been made in order to effect a purpose which the statute renders unlawful; or • the contract, although lawful according to its own terms, may be peformed in a manner which the statute prohibits: Burmic Pty Ltd v Goldview Pty Ltd [2003] 2 Qd R 477. Otherwise the statute may have intended to limit the sanction for noncompliance to a penalty or fine specified in the statute, but leaving the validity of the contract involving the conduct unimpaired, which ultimately was the case in Yango: Case study Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 [3.294] The respondent lent the first appellant money, secured by a mortgage incorporating a guarantee given by the other appellants. On default, the respondent sued the appellants who in turn argued that the transaction was illegal and void on the basis that the respondent was carrying on the business of banking without being authorised under the Banking Act 1959 (Cth), which carried a $10,000 fine per day. The parties agreed that the respondent was [3.294] 143

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carrying on banking but that in itself did not render the contract illegal and unenforceable. It was held that having regard to the scope and object of the Act, and to the heavy fine, the provision did not prohibit, or operate to vitiate (invalidate), such a transaction and so the respondent could enforce the agreement.

But compare: Case study Buckland v Massey [1985] 1 Qd R 502 (FC)

[3.295] A Queensland Act made it an offence to sell a second-hand car without a roadworthy certificate (RWC). It was agreed between a buyer and seller that the seller did not need to obtain an RWC. When the seller sought to recover the balance of the purchase price the court found that the Act was concerned with ensuring that vehicles were roadworthy and the clear intention of the Act was to prohibit the sale of second-hand vehicles without an RWC. It was held that as the contract was impliedly prohibited under the Act, it was unenforceable.

[3.296] Note that representations which are false, ie, misrepresentations or deceptive conduct under s 18 of the Australian Consumer Law do not render the contract void and unenforceable even if there has been illegal conduct, though there are remedies whereby the contract may be declared void by a court because of such actions: Bank of America Australia Ltd v Ceda Jon International Pty Ltd (1988) 17 NSWLR 290. If the conduct complained of is innocent and incidental to the performance of the contract (“incidental illegality”), the contract may not be illegal and unenforceable: Case study St John Shipping Corporation v Joseph Rank Ltd [1975] 1 QB 267

[3.297] A ship carrying grain from the United States to England was overloaded by the plaintiff during the voyage, which was a breach of the Merchant Shipping Act 1932 (UK). When the ship arrived in England, the Master was successfully prosecuted for that breach. The defendants refused to pay part of the freight costs on the grounds that the plaintiff had performed the contract in an illegal manner. A court found that the illegal loading was incidental, rather than central, to the performance of the contract. The Act was not intended to invalidate contracts, but to impose fines for its breach and therefore the contract was valid as performed.

[3.298] A statutory prohibition may make a contract:

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• illegal as formed (ie, it is prohibited expressly or impliedly from inception as in Re Mahmoud & Ispahani [1921] 2 KB 716, discussed at [3.291]); if a contract is expressly prohibited by statute then it is illegal and unenforceable; or • illegal because of the way the contract is performed, despite the contract being legal when it was created: Case study Ashmore, Benson, Pease & Co Ltd v AV Dawson Ltd [1973] 1 WLR 828

[3.299] The plaintiffs contracted with the defendants to move a crane weighing 25 tons by road. Under the relevant motor vehicle legislation, it was unlawful to allow a motor vehicle on the road weighing more than 30 tons. Both parties were aware of the legislation. The 10-ton truck carrying the crane rolled over and the crane was damaged. When the plaintiffs sued the defendants for damages, it was held that a contract could be transformed into an illegal one by performance, in this case there was both knowledge of illegality and participation in an illegal performance by the parties to the agreement. The method of performance was illegal as the weight of the truck and load exceeded 30 tons and therefore the contract was unenforceable.

[3.300] Note that if the conduct is only incidental to the performance of the contract, the contract is not unenforceable: see St John Shipping Corporation v Joseph Rank Ltd [1975] 1 QB 267 at [3.297].

Contracts void by statute [3.305] Some contracts are not illegal but are made void (of no legal effect) by statute (eg, a term in a contract that attempts to exclude the Competition and Consumer Act 2010 (Cth) is void under s 45 of that Act, many gaming or wagering contracts are void) and cannot be enforced in the courts. Amounts paid under such contracts may be recoverable in restitution if recovery under the relevant legislation is not possible. Agreements by way of gaming or betting, except with a licensed person, are void; s 56 of the Unlawful Gambling Act 1998 (NSW) prohibits the enforcement of any recovery of moneys under any agreement relating to gambling banned by this legislation.

Contracts illegal at common law [3.310] Contracts may be illegal under common law according to accepted community standards, noting that community standards may change over time, eg, what amounts to immorality, corruption or avoidance of tax may change with time according to events occurring within society or changing social mores. Contracts considered illegal at common law are as follows: • contracts entered into with the intent to commit a crime, tort or fraud on another; [3.310] 145

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• contracts promoting sexual immorality (note these are susceptible to changing community standards): Case study Seidler v Schallhofer [1982] 2 NSWLR 80

[3.311] An agreement provided for the continuation of a de facto relationship for six months and then marriage or separation. In the event of separation, the plaintiff was to get a refund of her payments towards the purchase of a house in return for the transfer to the defendant of her half-share as joint tenant. It was held that the agreement was not void as being contrary to public policy; standards can change with time.

[3.312] A person can indirectly assist wrongdoing, eg, facilitation, by hiring out cars for immoral purposes: Upfill v Wright [1911] 1 KB 506. However, working in a massage parlour as a receptionist is not a contract void for illegality, and consequently the receptionist could claim workers’ compensation for an injury: Barac (t/as Exotic Studios) v Farnell (1994) 53 FCR 193. • contracts prejudicial to the administration of justice (including agreements to stifle a prosecution, and agreements for the maintenance of a suit and champerty): Case study Public Service Employees Credit Union Co-Operative Ltd v Campion (1984) 75 FLR 131

[3.313] The defendant guaranteed repayment of a loan advanced by the credit union to his son on the understanding that the credit union would not report his son to the police for misappropriation of credit union money. It was held that the guarantee was void for illegality as any agreement to prevent prosecution is an indictable offence.

But compare: Case study Scolio Pty Ltd v Cote (1992) 6 WAR 475

[3.314] An auditor's report disclosed evidence of misappropriation by the respondent, a manager of the appellant company. The manager signed a deed saying he would repay the money by instalments on the understanding the report would not be referred to the police. It was held that the deed was enforceable as there was no evidence that the manager had signed it under duress or that there was evidence of an implicit agreement to stifle a prosecution.

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• maintenance of a suit and champerty: maintenance of a suit is to encourage another to take litigation, even though the party encouraging the action has no interest in the matter. Champerty on the other hand is maintaining the suit on the understanding that the person promoting the legal action will receive some share of the benefits that accrue to the party who is the subject of the legal action. There appears to be a number of exceptions to this, eg, class actions where the lawyers take a percentage of a settlement are now permitted under legislation. • contracts tending to promote corruption in public life: ie, using an official position to obtain a benefit for another, eg, a contract to procure an honorific title. Case study Parkinson v College of Ambulance Ltd [1925] 2 KB 1

[3.315] The plaintiff “donated” a substantial sum of money to the defendant's charity in reliance on a promise that he would get a knighthood in return. When he did not receive a knighthood he sued for return of the money. It was held that the agreement was illegal as being contrary to public policy.

• contracts prejudicial to public safety, eg, trading with the enemy in wartime or conducting an agreement which is contrary to friendly relations between one country and another; and • contracts to defraud the revenue: Case study Alexander v Rayson [1936] 1 KB 169

[3.316] Alexander let a flat to Rayson for £1,200 per annum. To get a low value for rating purposes, Alexander had two written agreements drawn up, one stating the flat was being let for £450 per annum and the other being an agreement by Rayson to pay £750 per annum for services in connection with the flat. Rayson missed paying an instalment and when Alexander sued, it was held that the agreement was illegal as it was made to defraud the revenue.

Contracts void at common law [3.320] Three types of contracts are deemed void (not illegal) at common law on the grounds of public policy. They are: • contracts to oust the jurisdiction of the courts; the courts will not allow a contractual term that bars the courts from hearing a matter. Note that a contract may stipulate that the agreement is based on honour only (Rose & Frank Co v JR Crompton & Bros Ltd [1925] AC 445), or that an arbitration clause will apply first. A court will refuse to uphold any terms of a contract where a party attempts to prevent a party from taking a matter to court: [3.320] 147

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Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337. In Brooks v Burns Philp Trustee Co Ltd (1969) 121 CLR 432, the High Court held that a clause in an agreement between husband and wife, basically to remove the power of the Family Court to make orders for payment for alimony while other matters were pending, was void, because it removed the power of the court. • contracts prejudicial to the status of marriage, eg, a pre-nuptial contract not to live together, or a contract that arranges a marriage for payment; and • certain contracts in restraint of trade: see [3.330].

Contracts in restraint of trade [3.330] Certain contracts, or clauses (called “covenants”) in contracts, that act in restraint of trade are prima facie void at common law as being contrary to public policy. A contract is said to be “in restraint of trade” when it limits the free exercise of commerce in any way. For instance, restricting a seller’s freedom to set up a competing business after selling a business (this is referred to as a “non-compete” clause) generally protects the goodwill the buyer has paid for when buying the business. Where such a clause is void in restraint of trade the courts will usually sever the clause so that the agreement in which it is contained remains valid. Courts recognise that employers should be able to protect their trade secrets, customer lists, confidential information, know-how and the special knowledge which is unique to the employer. An employer who has built up a customer base can sue for damages if this information is used improperly: Two Lands Services Pty Ltd v Cave [2000] NSWSC 14. A contract may protect the employer’s interests with a restraints clause, if information, contacts or processes used in the business are considered intrinsically confidential such that an employee could not treat that information as their own property, and the information could be protected for a reasonable period of time after the employee ceases employment: Metrans Pty Ltd v Courtney-Smith (1983) 8 IR 379. Courts will consider if the restraint is reasonable in the circumstances; where, eg, an employee leaves an employer and starts a new company in order to disguise that they are working in competition, the court may pierce the veil of incorporation and hold that the ex-employee is breaching their original agreement: Gilford Motor Co Ltd v Horne [1933] Ch 935. Only the following classes of contract (or the clauses within those types of contract) fall within the common law restraint of trade doctrine: • contracts for the sale of a business; • contracts of service or employment; and • partnership agreements. While many restraint of trade practices are dealt with under Pt IV (the restrictive trade practices provisions) of the Competition and Consumer Act 2010 148 [3.330]

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(Cth) (CCA) (see Chapter 18 (Davenport)), the common law restraint of trade doctrine still operates concurrently with the CCA (s 4M): Case study Adamson v West Perth Football Club Inc (1979) 39 FLR 199

[3.331] Adamson was a professional footballer with a Western Australian club. An offer was made to him to play for a South Australian club and so he moved to South Australia. Under the rules of the National Football League, which were binding on Leagues in both States, clubs and players, a player had to obtain a permit to play for a particular club. Before a permit was issued, Adamson had to obtain a clearance from the Western Australian National Football League, which they refused. It was held that his application under s 45(2) of the Trade Practices Act 1974 (Cth) failed because they were found to be expressly excluded from s 45 by the definition of “services” in s 4 which excluded employees. However, at common law the rules were found to be an unreasonable restraint of trade as they infringed the freedom and interests of the players.

[3.335] Note that such contracts are prima facie void. This means that they will be binding on the parties if the person relying on the clause can show to the satisfaction of the court that: • the restraint is reasonable as between the parties; it is no wider or more expansive than would be reasonably necessary to protect the person for whose benefit it is imposed; and • the restraint is reasonable in the public interest and not injurious to the public. In applying these tests, the geographic extent of the restraint, the time period involved, and the type of business and activity being restrained are all important factors to be taken into account. In Australian Capital Territory v Munday (2000) 99 FCR 72 the court applied a “structure of trading society” test in determining which contracts may or may not be covered by the restraint of trade doctrine. Where certain practices are acceptable and considered necessary as part of usual trading practice then they will not be covered by restraint of trade. This test was first formulated in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269. Note that while a practice may not be covered by legislation, the common law may find it a restraint of trade.

Contracts for the sale of a business [3.340] The purchaser of a business will generally want to restrain the vendor from setting up in competition for a specified period and within a specified area to protect the goodwill associated with the business. It is a question of fact whether a restraint is reasonable and it assumes that the parties are in an equal bargaining position:

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Case study Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535

[3.345] Nordenfelt sold his munitions business, which operated worldwide. He sold his business to the respondent company and a clause provided that he would not compete either directly or indirectly with the company in the making of guns or ammunition for 25 years. After a number of years, Nordenfelt entered into an agreement with a rival company in breach of the clause. It was held that the restraint was valid as it was reasonable in the interests of the contracting parties and the public with regard to the nature of the business.

Contracts of employment [3.350] As employees will often have access to trade secrets, confidential information, mailing lists, and secret processes, and acquire special skills in the course of their employment, their contracts of employment will sometimes contain covenants restricting them in the use of that information if they should leave and work for a rival employer. Such restraints may be enforceable as long as they are reasonable. But note that the parties are generally not in an equal bargaining position, so the courts look closely at the issue of fairness in these clauses. Note that an employee must be able to use their skills and knowledge to earn a living: Lindner v Murdock’s Garage (1950) 83 CLR 628. Some terms are implicit, eg, using customer lists or disclosing secret processes is prohibited under employment law. In Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337 the New South Wales Supreme Court found that where an employee had a contract (containing a restraint clause) to provide “special services”, the restraint could be enforced if it was reasonable and not oppressive, and part of a freely negotiated bargain. But anything which exceeded what was reasonable would not be permitted: Case study Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] Ch 169

[3.351] B employed A to undertake highly skilled work with access to secret manufacturing data. In his spare time A worked for C, who was in competition with B, on similar work. It was held that A could be restrained from working for C as it was his duty to be faithful to B (ie, A's primary duty was to his full-time employer, B).

Courts will usually read the clauses restraining employment as contra proferentum and read them against the party relying on them, taking into account any differences in the bargaining power of the parties. The restraint must be reasonable and not intended to only protect the employer against competition, ie, a person has a right to compete against

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others and any imposed restraint cannot be imposed without a good reason, eg, stopping any potential competition is not considered a sufficient reason: Case study Herbert Morris Ltd v Saxelby [1916] AC 688

[3.352] Saxelby had worked for Herbert Morris for 12 years. He had made a covenant with them that should he leave, he would not work in the United Kingdom or Ireland in a like business for a further seven years. When he left the company and joined a competitor, his former employer tried to enforce the covenant. It was held that the covenant was void as it was an attempt to prevent a person from using their own general skill and knowledge and went beyond what was necessary to protect the interests of the former employer.

Case study Drake Personnel Ltd v Beddison [1979] VR 13

[3.353] The defendant had worked for the plaintiff, an employment agency, and included as terms in his contract of employment were covenants that should he leave he would not for a period of 12 months and within 25 miles set up a rival business. Within a month of leaving, the defendant had set up a rival business half a mile from the plaintiff. It was held that the covenant was void for being unreasonable.

But note that each case must be judged on its own merits in terms of whether the restraint is reasonable in the circumstances: Case study NE Perry Pty Ltd v Judge (2002) 84 SASR 86

[3.354] As part of working in a town practice, a chiropractor agreed that for two years after the termination of a contract he would not work in the town, or induce any clients of the practice to become his own. This was not a contract of employment. It was held that the covenant not to practise in the town for two years was unenforceable as the gap required to break the connection between the chiropractor and the patients was unreasonable. One year would be enough. However, the covenant not to induce clients of the practice to become his own was reasonable since inducement struck at the clinic's goodwill.

Case study Buckley v Tutty (1971) 125 CLR 353

[3.355] Tutty had contracted to play football for Balmain Rugby League Club. His terms of contract with the club incorporated “all Rules, Regulations and By-Laws of the NSW Rugby League”, including a rule which provided that he could not transfer to any other club without the consent of Balmain, and even [3.355] 151

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if they did consent, they could determine the transfer fee. Tutty applied to the club for a transfer and was refused. It was held that the rules relating to the retention and transfer of players amounted to a restraint of trade because they went beyond what was reasonable as they prevented a player from transferring to another club, even after he had ceased to play for the club which retained him.

Case study A Schroeder Music Publishing Co Ltd v Macaulay [1974] 1 WLR 1308

[3.356] Macaulay, a 21-year-old unknown songwriter, entered into a five-year exclusive agreement with Schroeder's on one of the company's standard form contracts. It contained an automatic option to extend for a further five years if royalties exceeded £5,000, subject to the company's right to terminate on a month's notice. Copyright in all music was assigned to the company. Apart from an initial £50, Macaulay received no payment unless his music was published and the company was under no obligation to publish or promote his work. It was held that the contract was an unreasonable restraint of trade. The company had used its superior bargaining power to extract promises from the songwriter that were unfair to him.

[3.357] Where there is a relative inequality of the bargaining position of the parties, this is determined by fairness in the situation. In Panayiotou v Sony Music Entertainment (UK) Ltd [1994] Ch 142 (the George Michael Case), the court refused his claim of an unreasonable restraint of trade; the restraint was reasonable because he had had legal advice and got the benefit of a contract when starting his career.

Consequences of an agreement being prohibited [3.360] Contracts illegal or void at common law, or pursuant to legislation, are void and unenforceable unless the offending clause/s can be severed from the agreement. As a general rule, courts will only sever a clause/s where to do so would not alter the nature and effect of the contract as a whole. Notwithstanding that this test may be satisfied on the facts, courts will rarely sever a clause from an illegal (as opposed to void) contract.

Consequences of illegal contracts [3.370] As a general rule, the general effect of illegality in the formation of a contract is that the contract is void. Money paid pursuant to an illegal agreement will not be recoverable unless the parties were not “in pari delicto” (equally to blame). The parties will not be “in pari delicto” where one party induced the other to enter the agreement by unfair conduct:

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Case study Shelley v Paddock [1980] QB 348

[3.375] The plaintiff, an English resident, agreed to purchase a house in Spain from the defendants, who were English nationals resident in Spain. They said they were selling the house as agents for the owner, which was not true. The plaintiff paid the defendants the purchase price, but on discovering the true situation, they sued for their money. The defendants argued the moneys were irrecoverable on the ground the transaction was illegal under a United Kingdom Act. It was held that the plaintiff could recover the money as the parties were not in pari delicto.

Consequences of void contracts [3.380] Where a contract is void but not illegal, the contract will be unenforceable to the extent that its terms contravene the statutory or common law restraint. If that part of the contract which is void can be severed, the rest of the contract can still be enforced. Money paid is generally recoverable: Case study Hermann v Charlesworth [1905] 2 KB 123

[3.385] The defendant agreed he would introduce men to the plaintiff, an unmarried lady, with a view to marriage for an initial fee of £52 and a later payment of £250 should a marriage take place. He introduced a number of men to her and wrote to numerous others on her behalf without success. It was held that the plaintiff was entitled to her money back as the payment had been made under a void contract.

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Figure 3.4: Illegality of object

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Figure 3.5: Is the agreement prohibited at common law or by legislation?

ENDING A CONTRACT Principles [3.390] This Topic explains the ways in which a contract may be ended (discharged or terminated) and the effects of this “end” on the parties to the agreement.

Ways in which a contract may end Performance [3.400] A contract will end when the agreement has been fully performed by both parties (ie, there has been complete performance in strict accordance with the terms of the contract).

Payment of money [3.410] Where the obligation to perform involves payment of money, generally a creditor is entitled to require payment by legal tender (ie, Australian currency, although the Currency Act 1965 (Cth) limits how much you can pay with coins). Performance is not “complete” until legal tender is provided. Increasingly, payments are made electronically and payment is complete when a receipt number is issued. [3.410] 155

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Payment by cheque [3.420] Where payment is to be by cheque (or other negotiable instrument such as a bill of exchange), payment is “complete” when the cheque or negotiable instrument is accepted in absolute satisfaction of the debt owed. A creditor who accepts payment by negotiable instrument in absolute satisfaction of a debt owed impliedly agrees that, should the instrument be dishonoured, the debtor is only liable on the negotiable instrument and not for breach of contract since the contract will have been discharged by performance. Where a negotiable instrument is merely accepted in conditional satisfaction of the debt owed, performance is not “complete” until the instrument has been honoured (ie, the amount has been paid into the creditor’s account). If the instrument is dishonoured, the creditor may sue either on the instrument or for breach of contract (since the contract will not have ended) in order to recover the amount owed. Whether a negotiable instrument has been accepted in absolute or conditional satisfaction of the debt owed may be expressly provided in the contract. If it is not, acceptance is deemed to be conditional and the contract is not discharged on payment by a negotiable instrument.

Payment by post [3.430] A contract is not “complete” upon payment by post unless the creditor expressly or impliedly authorised payment by this method. If the creditor did authorise payment by post, and the payment was stolen or lost in the post, the creditor could not sue the debtor for breach of contract since the contract would have been discharged on posting. Note that where the creditor requests payment by post it is likely to be construed as authorising payment by cheque rather than cash, and not complete till received and stamped at the office.

Appropriation of payments [3.440] Where a debtor owes the creditor several debts arising from different contracts, the general rule is that the debtor may nominate which of the debts is to be discharged. The reason is that different debts may carry different interest rates. The creditor must comply with an express appropriation by the debtor.

Discharge by attempted performance [3.450] A contract may be discharged by attempted performance (or “tender”) where one party was prevented from completely performing their obligations by the conduct of the other party to the contract (the law regards attempted performance as tantamount to actual performance). The other party cannot then subsequently sue the non-performing party for breach of contract for non-performance. However, the party who attempted performance may sue for any damages incurred as a result of the other party’s refusal to accept performance. 156 [3.420]

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Should a party refuse to accept a tender of money, being legal tender, the contract is not discharged; however, the debtor does not have to seek out the creditor again but must remain ready and willing to pay the debt.

Termination by subsequent agreement [3.460] As a contract is the result of agreement, it can be terminated by a subsequent agreement. Although the further agreement must be valid in order to modify a prior contract, a void agreement cannot rescind or vary a valid earlier contract: Coghlan v Pyoanee Pty Ltd [2003] 2 Qd R 636. Which method of discharge is appropriate will depend on the circumstances under which the parties wish to end the contract but it may take the form of: • mutual discharge; • release; • substituted agreement (change to the terms of the original agreement); or • accord and satisfaction.

Mutual discharge [3.470] Termination by mutual discharge can be used where neither party has completed their obligations under the contract. Mutual discharge amounts to a contract to end a contract (ie, an agreement to end a contract, supported by consideration, will end the original agreement). Since each party agrees to relinquish rights under the first contract, the second contract is supported by consideration. Figure 3.6: Termination by mutual discharge

Release [3.480] Termination by release may be used where one party, A, has completed their obligations under the agreement, but the other party, B, has not. It amounts to a contract to abandon rights under the original agreement. However, unlike mutual discharge, no consideration is moving from B as B is promising to do no more than he or she is already legally bound to do under the original agreement. So, unless A’s promise is under seal, A may subsequently sue B for breach of contract. Therefore, termination by release is generally done by way of deed. [3.480] 157

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Figure 3.7: Termination by release

Substituted agreement [3.490] Termination by substituted agreement is appropriate where the parties wish to abandon the original agreement and substitute a new one (on different terms) in its place. As with termination by mutual release, the consideration for abandoning the rights under the old agreement is the promise of each party to enter a new agreement on new terms. The new contract could be by novation. The variation should be in the same form as the original contract, eg, if oral, varied orally, or if in writing, then it should be varied in writing. Note that the Statute of Frauds 1677 may apply so that certain matters need to be evidenced in the new agreement. See [2.800].

Accord and satisfaction [3.500] Termination by accord and satisfaction occurs where one party is in breach of contract and the other party agrees to terminate the agreement, and abandons the cause of action, in return for valuable consideration from the party in breach (which must be something more than the party was bound to do under the original agreement). This covers a case of discharge by breach of the contract, with the party suffering the breach accepting some consideration for their promise not to pursue further action for breach, noting under the rule in Pinnel’s Case (1602) 77 ER 237 that the consideration must be sufficient to seal the agreement.

Contingent conditions [3.510] The parties may agree that either or both of the parties should have the option to determine the agreement at a certain time, or on the happening of a certain event, and include clauses giving either or both the option to terminate. Such a clause may be: • a condition precedent, ie, a term that either relates to the formation or existence of a contract, or to the performance of a party’s obligations under a contract. In the case of the former, a contract is prevented from coming into existence until the condition is met while in the case of the latter a contract exists but the condition is an option to terminate. The condition could be precedent to

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the formation or existence of a contract or precedent to the performance of the party’s obligations under a contract: Case study Sandra Investments Pty Ltd v Booth (1983) 153 CLR 153

[3.511] A contract for the sale of land contained a clause which stated that the contract was subject to and conditional upon the approval of the local council within six months or the purchaser could cancel the contract. Approval was not obtained and the purchaser waived the condition but the vendor refused to complete. It was held that the condition was a condition precedent to performance and that a contract existed prior to council approval. The purchaser had the choice to allow the contract to continue if the condition was not satisfied and elect to waive it or terminate the contract.

[3.512] • Where possible, the courts tend to construe clauses as conditions precedent to performance rather than formation of the contract (Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537); • a condition subsequent, ie, a term contained in the contract which provides that on the happening of a certain event after the contract is made, the whole contract can automatically terminate (or that part of the contract to which the term applies can be terminated): Case study Geipel v Smith (1872) LR 7 QB 404

[3.515] D chartered a ship from B to load and carry coal from Hamburg. One of the conditions in the contract was a term that the contract could be suspended in the event of war breaking out. In this case war broke out between France and Germany and Hamburg was blockaded, so B refused to load the coal. It was held that the clause was a condition subsequent and that the outbreak of war triggered the term so that B was released from the charterparty.

Any obligations that may have arisen prior to the operation of the condition subsequent still have to be honoured. Figure 3.8: Discharge in accordance with a condition subsequent

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Termination by breach [3.520] Breach of contract occurs where one party to the contract does not perform their obligations under the contract in accordance with its terms. It may take the form of repudiation or breach of a term. The terms of a contract may allow for either an express provision to terminate or it may be implied. An express term might be, for instance in the case of a bank loan, that the bank can terminate its contractual arrangements with the borrower in the “event of a default” by the borrower, and declare that the moneys lent are immediately due and payable: Pan Foods Company Importers & Distributors Pty Ltd v Australian and New Zealand Banking Group Ltd (2000) 74 ALJR 791 (HC). A simpler expiration term might be that the contract ends at a specific point in time, eg, at the expiration of time on a lease. Alternatively there may be an implied right to terminate. A contract may not contain a provision as to the duration of the agreement, the court may imply a right to terminate on giving reasonable notice to the other party, which with normal commercial notice might be sufficient, eg, in the case where a contract would not be expected to have an indefinite running time: Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438.

Repudiation [3.530] If one party repudiates the contract (ie, shows an intention not to perform their obligations under the agreement) before performance is due or complete, the innocent party may choose to: • accept repudiation (which must be of the whole contract), ie, treat it as an anticipatory breach at which point the contract is discharged, and the innocent party may sue for damages immediately: Case study Hochester v De La Tour (1853) 2 E & B 678; 118 ER 922

[3.531] A courier was hired in April 1852 to accompany the defendant on a tour commencing on 1 June. On 1 May the defendant wrote to the plaintiff saying he had changed his mind and no longer needed his services. He refused to pay any compensation. The plaintiff brought an action for breach on 22 May. It was held that the action of the defendant in cancelling the contract amounted to anticipatory breach.

• or ignore the repudiation and wait for performance, leaving the contract intact. If the other party does not perform then the innocent party may sue for damages for breach of contract. However, the defaulting party has an

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opportunity not only to complete the contract but also to take advantage of any changing circumstances which may allow her or him to legitimately decline to complete: Case study Avery v Bowden (1855) 5 E & B 714; 119 ER 647

[3.535] The defendant chartered the plaintiff's ship at a Russian port and agreed to load the ship with a cargo within 45 days. Shortly after entering into the charter the defendant began to advise the plaintiff he could not provide a cargo, but the plaintiff remained at the port in the hope the defendant would fulfil his promise. Before the 45 days were up the Crimean War broke out between England and Russia. It was held that even though the defendant had repudiated the contract, the plaintiff had not accepted the repudiation and kept the contract going. The outbreak of war discharged both parties from the contract as it would have been illegal to load a cargo at what had become a hostile port.

It can be difficult to determine whether or not a party’s words or conduct amount to a repudiation of the agreement. As a result, the innocent party must be very cautious about purporting to accept a repudiation and terminating an agreement. If the conduct of the other party did not, in law, amount to a repudiation, the innocent party will itself be in breach of contract for wrongfully terminating (repudiating) the agreement. Generally, the test is objective: “would a reasonable bystander infer that the party intended not to perform their obligations under the agreement?”.

Breach in fulfilling terms [3.540] Where a breach in performance has occurred, whether the breach is so serious as to entitle the innocent party to treat the contract as repudiated or only to be able to sue for damages, depends on whether the acts or omissions of the defaulting party indicated an intention to repudiate the whole contract or carry it out in a way that is inconsistent with their obligations: Case study Hudson Crushed Metals Pty Ltd v Henry [1985] 1 Qd R 202

[3.541] Where 11 breaches of contract had occurred, each on its own not being sufficiently serious to entitle repudiation, taken as a whole it was held that it was clear that the party in breach intended to fulfil the contract in a manner that was substantially inconsistent with its obligations under it.

A contract may be discharged through mutual abandonment where the conduct of both parties shows an intention to put an end to the contract.

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A contract may be brought to an end where there has been a breach of an essential term or obligation under the contract, ie, one party to a contract breaches a condition of that agreement (as opposed to a mere warranty). The innocent party may: • terminate the agreement for breach of condition (and sue for damages for breach): Case study Squatting & Investment Co Ltd v Permewan Wright & Co Ltd (1885) 6 ALT 607

[3.545] A, the owner of a sheep station, needed certain goods and the removal of a large quantity of wool from the shearing shed before shearing could be done. This needed to be done quickly as the area was in drought and the sheep needed to be shorn or the quality of the wool would decline and many of the sheep would die. B was instructed to deliver the goods by a certain date and to take the wool on the return journey. B only delivered part of the order and not by the due date, nor did he take all the wool. It was held that B's neglect of the terms of the contract amounted to a breach of a condition and the contract was terminated as a result.

• or continue with the agreement and sue for damages.

Discharge by frustration [3.550] A contract may be automatically terminated on the occurrence of an unforeseen event (a frustrating event), ie, an event so serious in nature that it renders further performance of the contract illegal, impossible or radically different from that contemplated by the parties at the outset: Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696. Frustration is not available where the parties could have foreseen the situation, the event was self-induced by the party pleading frustration, hardship, inconvenience or expense in performance. Frustration can only arise where: • there is an unforeseen event outside the control of the parties (a supervening event) which has significantly or radically altered the obligations of the parties from their original intentions; • neither party caused the supervening event; • neither party contemplated the supervening event, so there was no provision for it in the contract; and • the new circumstances render further performance of the contract illegal, impossible or radically different from that contemplated by the parties at the outset:

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Case study Cricklewood Property and Investment Trust Ltd v Leighton's Investment Trust Ltd [1945] AC 221

[3.551] The lessees had a 99-year lease and had begun to build shops on the site when they were stopped by regulations making materials unobtainable during the period of the war. The lessor sued for recovery of rents under the lease and the lessees pleaded frustration. It was held that since it was a 99-year lease, the interruption was only temporary and it did not destroy the identity of the arrangement, so frustration could not succeed.

Cases where a contract will be terminated by application of the doctrine include: • supervening illegality where there has been a subsequent change in the law rendering further performance illegal: Case study Ertel Bieber & Co v Rio Tinto Co Ltd [1918] AC 260

[3.552] An English company contracted with a German company to deliver copper from 1911 to 1919. The outbreak of World War I in 1914 was held to frustrate the contract.

• death or illness where the contract is one for personal services and the party performing the service becomes ill or dies; • physical destruction of subject matter before performance falls due; • non-occurrence of an event basic to the entire contract: Case study Krell v Henry [1903] 2 KB 740

[3.553] Henry hired a room from Krell to watch the coronation procession of Edward VI. The procession was postponed due to the illness of Edward but Krell claimed the rent. It was held that as the contract only had one purpose, it was frustrated by the cancellation of the coronation.

But compare: Case study Herne Bay Steamboat Co v Hutton [1903] 2 KB 683

[3.554] The company agreed to hire a boat to Herne to watch a naval review at the coronation of Edward VI and for a cruise around the bay. The review was cancelled due to the illness of Edward. It was held that as the naval review was not the sole basis of the contract (the cruise around the bay could have still been undertaken), the contract was not frustrated.

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• government intervention; • where the particular state of affairs ceases to exist or substantially changes: Case study Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337

[3.555] Codelfa entered into a contract with State Rail to excavate an underground railway tunnel within 130 weeks of the signing of the contract. Time was made the essence of the contract and both parties were aware that Codelfa would need to work 24 hours a day, six days a week. However, contrary to legal opinion given to State Rail, because of the noise and vibrations a local resident obtained an injunction stopping work between 10pm and 6am. Codelfa contended that the changed working conditions as a result of the granting of the injunction which had not been foreseen by either party frustrated the contract. It was held that the grant of the injunction made performance radically or fundamentally different from that undertaken by the contract, resulting in frustration of the contract.

[3.556] The effect of a frustrating event is that the whole contract ends at the date of frustration and not just parts of it. As a general rule, moneys paid under the contract to the frustrating date are not recoverable unless there is a total failure of consideration. Figure 3.9: Effect of frustration

The Frustrated Contracts Act 1959 (Vic), Frustrated Contracts Act 1978 (NSW) and Frustrated Contracts Act 1988 (SA) attempt to overcome the harshness of the operation of the doctrine of frustration. In New South Wales it provides, inter alia, for the repayment of moneys paid before frustration and reasonable payment for any benefit derived under a frustrated contract. In Victoria, expenses incurred before frustration are recoverable, see also Australian Consumer Law and Fair Trading Act 2012 (Vic). South Australia has adopted an equitable approach based on distributive justice whereby neither party is advantaged or disadvantaged by the frustration. Note, however, that the contract may itself oust the jurisdiction of the Frustrated Contracts Acts, in which case the common law rule will apply. 164 [3.555]

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Discharge in accordance with law By operation of legislation [3.560] In certain circumstances legislation will provide that a contract is discharged automatically, irrespective of the intentions of the parties (eg, the Bankruptcy Act 1966 (Cth), which provides that a trustee in bankruptcy may adopt or rescind certain contracts into which the bankrupt has entered: see Chapter 31 (Davenport)).

Merger [3.570] The doctrine of merger provides that where the parties to an oral agreement replace that agreement with a deed, the oral contract becomes merged in the deed and is therefore discharged.

Consequences of discharge [3.580] When an otherwise enforceable contract comes to an end the effects are as follows: • all parties must fulfil their obligations so far as they fall due up until discharge (or be liable for breach of contract); • (because) any rights to sue for breach of contract that arose prior to discharge survive; • all parties are discharged from any future obligations under the agreement; and • (therefore) no party can accrue a new right to sue another party after discharge. Where the contract has been discharged for attempted performance, acceptance of repudiation or breach, the innocent party may also sue for damages on discharge. Figure 3.10: Contract discharged for attempted performance, acceptance of repudiation or breach

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requirements do not apply to the discharge of such agreements. Therefore a contract that may only be created in writing may be discharged orally. Table 3.3: Summary of discharge of contract Reason for discharge Performance Attempted performance

In accordance with condition subsequent Frustration

Operation of law

Exercise of an option to terminate Acceptance of repudiation Termination of breach of condition

Mutual discharge Release

Substituted agreement Accord and satisfaction

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Brief description Automatic discharge Both parties have completely performed their respective obligations under the agreement (performance) One party attempts to complete their contract but is prevented by the conduct of the other There is an exception with respect to payment of money The innocent party may sue for damages for non-acceptance and is not liable for non-performance A clause in the contract provides that the contract automatically ends on the happening of a certain event, which happens The contract is deemed terminated by reason of the occurrence of a serious unforeseen event rendering future performance illegal, impossible or radically different to that contemplated Case law or legislation deems that the contract ends in certain circumstances (eg, merger, or on the bankruptcy of a party to the agreement) Discharge at the instance of one party to the agreement A clause in the contract provides that the contract may be ended by one party on the happening of a certain event, which happens, and the party decides to end the contract One party renounces the contract or refuses to complete, or renders completion impossible, and the other party accepts this act of repudiation thereby ending the contract The innocent party terminates the contract for breach of condition The innocent party may also sue for damages for breach Discharge by agreement between the parties Neither party has completed the agreement, but both agree to abandon their contractual rights against each other, thereby ending the contract One party has completed his or her obligations under the contract and agrees to release the other from his or her obligations (for consideration or under seal) and end the contract As for mutual discharge, but a new contract is created between the parties in place of the old The party entitled to sue for breach of contract agrees not to sue in return for something from the other party (valuable consideration), and to end the contract

Date of discharge

On complete performance by both parties On attempted completion

Payment of money exception On the happening of that event On occurrence of frustrating event Check relevant law

When the party elects to terminate On acceptance of repudiation On election by the innocent party

On date agreed by the parties As above

As above As above

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REMEDIES AND RESTITUTION Principles [3.600] This section examines the remedies available for breach of contract. Generally, a plaintiff (P) may seek a remedy from a defendant (D) for breach of contract: 1.

where D has breached a term (condition or warranty) of that agreement; or

2.

where the contract has been discharged for: • attempted performance by P which was prevented by D; • repudiation of the agreement by D (accepted by P); or • breach of condition by D.

Note that terminating a contract is distinguished from repudiating a contract; a party may wrongfully repudiate a contract and refuse to carry out their obligations, whereupon the other party suffering the breach may terminate the contract (and sue for breach of contract). Usually a contract is terminated and comes to an end when there has been a breach of a condition, or major part of the contract. In some instances where even a non-essential term is breached, and the consequences are serious for the other party, this may be grounds for terminating the contract: Case study Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115

[3.605] The Land Council established a joint venture with Sanpine to develop Aboriginal land. Sanpine breached the agreement and furthermore did not keep adequate accounting records or have sufficient monitoring of the venture's finances — which contributed to the demise of the project. The High Court held that while the breaches themselves related to less substantial terms, the breaches had gross and serious consequences which caused substantial losses, and consequently allowed for the termination of the contract and for the plaintiff to claim damages.

If a party does not choose to end a contract when a breach occurs but continues with performance, then the parties are released from their performance and can only sue for damages resulting from the breach. Where there is a breach of a minor term, a warranty, the parties are obliged to perform their obligations under the agreement and the party suffering the breach can sue for damages only. There are three main remedies available for breach of contract: 1.

damages to compensate P for any losses flowing from D’s breach;

2.

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3.

an injunction to prevent D from breaching their obligations under the agreement.

The chapter also covers restitution. Restitution means restoration and aims at reversing the enrichment of one party at the expense of others by requiring the defendant to restore to the plaintiff the benefit of: • money; or • goods or services; which they received at the expense of the plaintiff, so that an order for restitution is imposed independently of the contractual terms.

Remedies for breach of contract Damages [3.610] Monetary damages are the usual (common law) remedy for breach of contract. Generally, P may sue the party in breach, D, for any loss resulting from D’s breach, subject to the rules that: • the loss must not be too remote from the breach; and • losses flowing from P’s failure to mitigate are not recoverable. The aim of damages is to place the innocent party, as far as possible, in the same position as they would have been in if the contract had been performed. Case study Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272

[3.611] The tenant of a building carried out extensive renovation to the landlord's property without permission and in contravention of the lease. The High Court found that the measure of damages should be equivalent to the cost of restoring the property to its original state before the renovations took place (before the breach occurred).

P must be able to show some loss to recover ordinary damages and to that end, the following High Court case provides the authority: Case study Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 [3.612] Amann contracted with the Commonwealth to conduct coastal surveillance for three years, and in expectation of performance outlaid considerable amounts on purchases of special aircraft. The Commonwealth terminated the contract, though with an invalid notice, which was held by the court to be a repudiation, so that Amann could now elect to terminate the contract and sue for damages. The High Court held that Amann could recover damages for the amount spent on preparing to carry out the contract (purchase of and equipping the aircraft) as “reliance damages” or expectation 168 [3.610]

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damages. The court could not determine the profits that may have resulted from performance of the contract.

[3.615] The principles flowing from Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 are: • generally, P will be entitled to recover loss of benefits if they can prove it, usually for loss of profits (“expectation damages”); If P can’t establish whether or not there would have been a profit: • damages for expenses (“reliance damages”) or wastage of expenses, are recoverable. If the plaintiff’s expenditure would not have been fully recovered if the contract had been carried out: • the amount P would have earned if the contract had been performed, though the defendant can attempt to refute this.

Remoteness of loss [3.620] P will only be able to recover damages to compensate for losses flowing from D’s breach that are not too remote from that breach. Generally, losses flowing from D’s breach are only recoverable where: • the loss arose naturally from the breach (ie, the loss arose in the normal course of things and as a direct result of the breach); or • the loss was actually contemplated by D as a probable result of their breach prior to the breach (ie, losses arising from special or exceptional circumstances and made known to the defendant at the time the contract was entered into): Case study Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145

[3.621] The crankshaft in Hadley's mill broke and he had to send it to the manufacturer for a pattern to be made. Baxendale, a carrier, promised Hadley that the crankshaft would reach the manufacturer the following day; however, in breach of agreement, delivery was several days later and the mill remained idle for longer than was anticipated. When Hadley claimed loss of profits for the longer period, it was held that the carrier was not liable as the loss did not flow naturally from the breach (first dot point at [3.620]) and the carriers had not been told that any delay by them could leave the mill idle (second dot point at [3.620]).

[3.622] These are known as the two limbs of the rule in Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145:

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Case study Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528

[3.623] Newman Industries contracted to sell a boiler to the plaintiffs. They were aware the boiler was urgently required and delivery was to be made on 5 June but it did not occur until 8 November. The plaintiffs claimed for loss of profits caused by the delay and loss of profits from certain dyeing contracts they would have been able to make if they had received the boiler on time. It was held that as the defendants knew that the plaintiffs wanted the boiler for immediate use, they were liable for the estimated loss of profits. They were not liable for the loss of the dyeing contracts as the defendants knew nothing of these contracts and could not have foreseen such a loss.

Case study H Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] 1 QB 791

[3.624] The plaintiffs ordered a bulk storage hopper for storing pignuts for feeding their pigs. The installation was defective and the nuts became mouldy, causing a large number of pigs to die. It was held that the plaintiffs were entitled to recover their loss as it was within the contemplation of the parties that if the hopper was negligently installed, in breach of the contract, so that the hopper was unfit for storing nuts, injury to the pigs was a serious possibility.

[3.625] The practical effect of the rule in Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145 is that where D breaches the agreement and causes P loss, P will be able to recover that loss where: • a reasonable person would have expected such a loss to flow from D’s breach; or • D was aware, prior to the breach, that should he or she breach the agreement P would suffer that loss (eg, because P made D aware of that fact). Case study Koufos v Czarnikow Ltd [1969] 1 AC 350

[3.626] The House of Lords held that for the possibility of damage to be within the contemplation of the parties in the contract, that they understood there was a real possibility of loss or injury. The court would examine whether, at the time the contract was made, a reasonable person should in their position have realised that such a loss was sufficiently likely to result from the breach of contract and that the loss flowed naturally from the breach or that loss would have been within the defendant's contemplation.

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Case study Day v O'Leary (1992) 57 SASR 206

[3.627] Damage caused to a floor by contractors (during renovations to a house to be leased) led to considerable delays and losses; the court, however, would not allow for losses of rent since the intention to rent out the house had not been conveyed to the other party, nor was it in the contemplation of the parties.

Mitigation of loss [3.630] Even if damages are prima facie recoverable as not too remote from D’s breach, P must take reasonable steps to mitigate (minimise) their loss flowing from D’s breach and this is a question of fact. The onus is on D to prove that there has been a failure to mitigate: Case study Payzu Ltd v Saunders [1919] 2 KB 581

[3.635] A contract of delivery by instalments provided that payment was to be made within a month of delivery, less a discount. The buyers failed to make a punctual payment for the first instalment and the seller wrongfully treated this as a repudiation but offered to continue deliveries if the buyers would pay cash on delivery. The buyers refused. As the price of the goods had risen, the buyers sued for breach. It was held that the seller was liable for damages as the failure to make a punctual payment on the first instalment did not amount to breach of a condition and so the seller could not treat the contract as repudiated. However, the buyers' failure to mitigate their loss by not accepting the seller's offer meant damages were assessed on the loss the buyers would have suffered had the offer been accepted.

Note that steps to mitigate are only those that can be reasonably expected, and a party is not expected to expose themselves to risk or unfair financial loss in order to reduce their loss, particularly where the loss is due to the defendant’s breach of contract.

Quantum of damages [3.640] If it is the case that P can establish that their losses are not too remote, and that they have mitigated their losses, P will be entitled to recover damages to compensate them for those losses. This is the case even if it is difficult to quantify or assess the loss in monetary terms (eg, in the case of a loss of a chance or opportunity):

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Case study Chaplin v Hicks [1911] 2 KB 786

[3.641] H, a theatrical manager, advertised a beauty competition whereby readers of certain magazines could select 50 ladies whom H would interview and select a final 12 who would be given theatrical work. C was one of the 50 selected by readers but as a result of H's breach of contract, was not given a reasonable opportunity to attend the interview and consequently lost the chance of selection. It was held that although it was problematical whether C would have been selected, and it was difficult to assess damages, the jury's assessment of damages for breach of contract should stand.

Case study Howe v Teefy (1927) 27 SR (NSW) 301

[3.645] The defendant leased a racehorse to the plaintiff trainer for three years. After three months the defendant took the horse back and the plaintiff brought an action for loss of profits he would have made from betting on the horse and supplying information for reward to others. The jury awarded the plaintiff damages and the defendant appealed on the grounds that prospective winnings and stable commissions were too remote to be recovered as damages. It was held that the appeal should be dismissed as the plaintiff had been deprived of his right to make what money he could from the use of the horse and that was assessable in monetary terms. Damages were awarded for the loss of a chance or opportunity to secure a benefit where there was a legal obligation to provide that chance or opportunity.

Even where it is difficult to quantify the loss in monetary terms as a result of a breach of contract, a court is still able to estimate the loss, even if it has to use guesswork out of necessity.

Type of losses recoverable [3.650] The general rule is that damages should place the plaintiff in the position he or she would have been in had the contract been fully performed as intended. As such, P is able to recover expectation losses (“lost” expected gains had the contract been completed) and reliance losses (wasted expenditure on the defunct agreement). Generally damages are not recoverable for any disappointment, distress, injured feelings or mere inconvenience arising from a breach of contract: Case study Falko v James McEwan & Co Pty Ltd [1977] VR 447 [3.651] The defendants contracted with the plaintiff, a householder, to supply and install a heater. The defendant installed the heater and engaged an electrician to connect it. When informed that a new point was necessary at an extra cost, the plaintiff refused to pay and so the wiring was not completed. 172 [3.641]

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The plaintiff then ran a temporary lead from another power point to the heater and sued the defendants, claiming damages for the cost of the installation and inconvenience. It was held that the contract was an ordinary commercial contract and the plaintiff could only recover damages for the cost of the installation.

However, there are two exceptions to this rule: • damages are recoverable where this disappointment or distress arises from a breach of an express or implied term that D will provide P with pleasure, enjoyment or personal protection: Case study Jarvis v Swan Tours Ltd [1972] 3 WLR 954

[3.652] Jarvis arranged a two-week holiday through Swan Tours on the basis of information in one of their brochures. However, few of the statements were true. It was held that Jarvis was entitled to damages not only for the breach but for the disappointment caused by the breach.

• and damages are recoverable for distress or disappointment consequent upon the suffering of physical injury or physical inconvenience: Case study Baltic Shipping Co v Dillon (1993) 176 CLR 344

[3.653] Dillon was a passenger on board a ship that struck a shoal and sank eight days into a 14-day cruise. An implied term of the contract was that the cruise would be an enjoyable and relaxing holiday. It was held that Dillon was entitled to damages for disappointment and distress in addition to compensatory damages for loss of personal effects. However, Dillon was not entitled to recover the whole of the cruise fare since there had not been a total failure of consideration as the cruise had lasted for eight days.

[3.655] A breach of contract may involve personal injury, mental illness or loss of reputation which may create a liability under tort law as well as contract. Note in Australia under the Civil Liability Acts in each State and Territory the legislation allows for an apportionment of damages where a breach of contractual duty of care has an element of contributory negligence: Civil Law (Wrongs) Act 2002 (ACT); Civil Liability Act 2002 (NSW); Civil Liability Act 2003 (Qld); Civil Liability Act 1936 (SA); Civil Liability Act 2002 (Tas); Wrongs Act 1958 (Vic); Civil Liability Act 2002 (WA) and see Chapter 28 (Davenport).

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Amount of damages [3.660] The next issue is how much P will recover by way of damages. The general rule is that, where the expectation or reliance losses can be quantified, P will receive this much. However, even where the loss cannot be accurately quantified, a court may be prepared to engage in some “guesswork” in order to make an order for damages: eg, Howe v Teefy (1927) 27 SR (NSW) 301 at [3.645]. The damages normally recovered by an innocent party for the actual loss suffered from breach are ordinary or compensatory damages. However, there are two other kinds of damages: • nominal damages will only be awarded if the innocent party is unable to establish that he or she has suffered any actual loss (eg, $1); and • exemplary damages may be awarded over and above that which would compensate P for the loss flowing from D’s breach in exceptional circumstances to punish D for an intentional or flagrant breach.

Penalties and liquidated damages clauses [3.670] A plaintiff can sue for either liquidated or unliquidated damages, or both, for breach of contract. If there is no amount mentioned in the contract in the event of breach and the matter is left to the court to decide, the damages are said to be “unliquidated”. If there is an amount specified in the contract, then the damages are said to be “liquidated”. When a contract specifies the amount of damages that are recoverable in respect of a breach, the amount specified in the contract must be a genuine pre-estimate of the loss flowing from the breach (ie, it should not be extravagant or out of proportion to the loss that could be suffered so that it is like a penalty). A penalty amounts to a potential payment designed to coerce performance (Fermiscan Pty Ltd v James (2009) 261 ALR 408), in which case the court may only allow for a payment equivalent to the loss as recovery where any further amount would be greater than the actual loss. Case study Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79

[3.671] Manufacturers sold tyres and other accessories to the defendants, who agreed not to sell these items below list price. The defendants also agreed to pay £5 damages for every breach of the agreement. They sold a tyre in breach of the agreement. It was held that the sum was not a penalty but a genuine pre-estimate of loss.

[3.675] Where, however, the amount provided for in the contract does not represent a genuine pre-estimate of the loss flowing from the breach, the courts will disregard that clause (it will be rendered void for being a penalty) and proceed to determine the quantum of damages in the usual way: eg, in O’Dea v 174 [3.660]

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Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359. The arrears of rent and specific costs were recoverable, but not amounts that were out of proportion to the loss.

Specific performance [3.680] A decree of specific performance is an order of the court requiring a party to perform their obligations under the contract. It is an equitable remedy and only available at the discretion of the court. Specific performance will not be granted where it causes unfairness or hardship to another party or an injustice. It is not available in the following circumstances: • where damages are an adequate remedy; • where the contract is for personal services; • where the order would require constant supervision by the court: Case study Ryan v Mutual Tontine Westminster Chambers Assoc [1893] 1 Ch 116

[3.685] The lessor of a block of flats agreed to provide a porter who would be constantly in attendance. The porter appointed by the lessor was a chef at a nearby club and absent for several hours each day, when his duties were performed by others. A tenant sought an order of specific performance of the obligation. It was held that it could not be ordered since the court could not guarantee that the porter would remain in constant attendance without constantly supervising such attendance.

• and where the order would not, theoretically, be available to the other party in the event of a breach.

Injunction [3.690] An injunction, like a decree of specific performance, is an equitable remedy and only available at the discretion of the court. It is an order of a court restraining a person from breaking their contract or committing a wrongful act. It will not be granted where its effect would be to compel a person to do something which he or she would not have been ordered to do by a decree of specific performance: Case study Page One Records Ltd v Britton [1968] 1 WLR 157

[3.691] The Troggs, a pop group, had appointed the plaintiff to be their exclusive manager for five years. However, The Troggs dismissed the plaintiff after a year and appointed another person. The plaintiff sought an injunction to stop The Troggs from dismissing him. It was held as a manager was necessary to operate successfully in the entertainment industry, an injunction [3.691] 175

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would have indirectly compelled The Troggs to continue to employ the plaintiff or remain idle, effectively amounting to enforcing a contract for personal services which would be unfair and cause hardship.

Case study Warner Bros Pictures Inc v Nelson [1937] 1 KB 209

[3.695] The defendant, a film actress, contracted to work exclusively for the plaintiffs for a year. In breach of the contract, she agreed to work as an actress for a third person and the plaintiffs sought an injunction to stop her. It was held that an injunction should be granted as the defendant was not being forced to work for the plaintiffs as she could choose to work in some other capacity than as an actress. The injunction therefore did not have the effect of enforcing a contract for personal services.

Limitation of actions [3.700] Even if the plaintiff has a valid cause of action, he or she must commence legal proceedings within a certain time period after the cause of action arose (ie, after the breach, or discharge of the agreement, as the case may be) or the proceedings will be statute barred (see the Statute of Limitations relevant to the jurisdiction): Civil Law (Wrongs) Act 2002 (ACT); Civil Liability Act 2002 (NSW); Civil Liability Act 2003 (Qld); Civil Liability Act 1936 (SA); Civil Liability Act 2002 (Tas); Wrongs Act 1958 (Vic); Civil Liability Act 2002 (WA). Table 3.4: Period for beginning legal proceedings Contracts under seal (deeds) NSW, Qld, Tas, NT: 12 years SA, Vic: 15 years

Other contracts NSW, Qld, Tas, SA, Vic, WA: six years NT: three years WA: 20 years

The statutory limitation period may be suspended at certain times (eg, while one party to the contract is a minor, and then it will start when they reach 18 years of age).

Statute-barred debts [3.710] In respect of statute-barred debts, the right of action may be revived by acknowledgment or part payment.

The basis of restitution [3.720] This is an order compelling a payment of money from one party to another where it would be unjust to allow one party to retain the benefit of money, goods or services which one party had received at the expense of another. This is a remedy imposed by law independently of contract, and action is brought because there is no express contract between the parties, or 176 [3.695]

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the contract is void or unenforceable, and restitution is provided because without it there would be no other remedy. Restitution is based on fixing unjust enrichment and will usually be awarded where: • the defendant has received some form of benefit (ie, has become “enriched”); • the benefit or “enrichment” was at the plaintiff’s expense; • it would be “unjust” to allow the defendant to retain the benefit; and • there are no defences available to the defendant.

Application Recovery of money paid [3.730] Restitution of money paid may be possible where: • there is a total failure of consideration and the plaintiff has received no benefit for the consideration they have provided (based on an action in unjust enrichment rather than a claim in contract); • money is paid under a fundamental mistake of fact unless the money is paid to an agent who in turn pays it to their principal, or on the principal’s behalf, before learning of the fundamental mistake: Case study Australia & New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662

[3.731] ANZ transferred $100,000 more than it should have to a Westpac customer and took three days to correct the mistake; it was held that Westpac was an agent for its customer and only liable for the $17,000 balance of the overpayment that was left (they would have been liable for the $100,000 if ANZ had immediately notified Westpac on the ground of fundamental mistake).

Case study Simos v National Bank of Australasia Ltd (1976) 10 ACTR 4

[3.732] A bank agreed to honour cheques only signed by both parties and by mistake paid cheques signed by one party, who misappropriated the proceeds; the bank had to reimburse the innocent party but could recover from the fraudulent party on the basis of their unjust enrichment at the bank's expense.

[3.732] 177

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Case study Commonwealth v McCormack (1984) 155 CLR 273

[3.735] A lessee had received $75,000 as an advance against any sum due under an arbitration and the arbitrator found in his favour and awarded him $215,000, which he was paid without any deduction of the advance; it was held that the $75,000 overpayment was recoverable.

• money is paid under mistake of law; • money is paid under duress or compulsion.

Recovery of a reasonable remuneration [3.740] A plaintiff may recover a reasonable remuneration on a quantum meruit where: • the defendant has received some benefit from the plaintiff; • there is no enforceable contract: Case study Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221

[3.741] A building contract was technically unenforceable because it was not in writing but the builder orally agreed to, and did, carry out the work. The respondent refused to pay and it was held that the builder was entitled to recover a reasonable sum for the work he had done based on restitution or unjust enrichment. • and the defendant would be unjustly enriched if they were not required to pay a reasonable price for the benefit. An action for quantum meruit can be used where the plaintiff has done work under a contract which has then been broken, entitling the other party to treat it as discharged: Case study Planché v Colburn (1831) 8 Bing 14; 131 ER 305

[3.742] A book was to be published by weekly instalments. After a number of instalments were published, the company stopped publishing the magazine. It was held that the plaintiff could recover on a quantum meruit claim for the work done under the contract, ie, he could claim for the instalments he had written.

A plaintiff who only partially fulfils their obligations will not usually be able to recover on quantum meruit for the work done if a contract is an entire contract:

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Case study Sumpter v Hedges [1898] 1 QB 673

[3.745] The plaintiff had agreed to build two houses but ran out of money and abandoned the contract half-way through; however, the defendant completed the work. It was held that the builder could not recover on a quantum meruit for the work he had done.

A plaintiff will be able to recover on a quantum meruit if they can show that the defendant received a benefit and had undertaken a new obligation to pay by entering into a new contract on the basis of the part performance.

Contracts having a foreign element [3.750] Where a contract is entered into between an Australian and a foreigner, or is made in one country and to be performed in whole or part in another, the law applicable is the law to which the parties intend to apply. Where the parties have selected which law is to apply, such law is the proper law. Where the parties have not chosen what law to apply, the court will look at all the circumstances in trying to judge the intention of the parties, including: • where the contract was made; • where it is to be performed; • the place which has the most real and substantial connection with the contract. Case study Kay's Leasing Corporation Pty Ltd v Fletcher (1964) 116 CLR 124

[3.755] A finance company incorporated in Victoria also carried on business in New South Wales. When it entered into agreements which stated that Victorian law was to apply and the agreements were executed by the plaintiff in Victoria and the defendant in New South Wales, it was held that the “proper law” was the law of Victoria.

Figure 3.11: Remedy for breach of contract?

[3.755] 179

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The following table may be of assistance in determining the appropriate remedy. Table 3.5: Determining appropriate remedies Plaintiff would like: – to be compensated by monetary payment for a loss – an order requiring the defendant to complete his or her obligations under the contract – an order preventing the defendant from breaching his or her obligations under the contract

Appropriate remedy Damages Specific performance Injunction

The following diagram may be of assistance in determining the quantum (amount) of damages available. Figure 3.12: Determining quantum of damages

Restitution [3.760] Questions on restitution will typically ask about: • the circumstances where restitution applies — when is money recoverable or when will an action on a quantum meruit be successful? • when is conflict of laws an issue?

180 [3.760]

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Figure 3.13: Where restitution applies

Revision questions 1

An expectant heir, heavily in debt but entitled to a large inheritance if he survived his father, borrowed money from a moneylender at an effective interest rate of 60 per cent per annum, secured. He received no independent legal advice prior to entering the transaction. Two years later, after the heir received the inheritance, the moneylender called in the loan. Advise the heir as to whether he can resist the moneylender’s attempted enforcement of the security.

2

The plaintiffs supplied to the defendants a “Roulette Royale” roulette table, roulette wheel and a croupier’s rake for use in the playing of that game. The defendants have failed to make the payments due under the agreement to date. It has recently emerged that the playing of “Roulette Royale” is, and always has been, illegal under the Casino Control Act 1992 (NSW). Neither party was aware of this at the time of making the agreement. Advise the plaintiffs as to whether they can recover the money owed under the contract.

3

A agrees to sell his car to B for $5,000. Moments after the contract was made, the car was destroyed by fire. Must B pay for the car? How would your answer change if, unbeknownst to both parties, at the time of contract the car had been destroyed by fire?

4

Annie ordered a lounge suite from Decorative Living Pty Ltd, a local furniture retailer. At the time of ordering she specified that she wanted it in cream. When the lounge suite was delivered Annie realised that it was peach and told the courier to take the suite back to the shop, stating [3.760] 181

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that she no longer wished to deal with that “incompetent” store. Is Annie entitled to treat the contract as at an end? 5

The plaintiff contracted to purchase a used car from the defendant for $28,000. On the day arranged for payment and delivery the defendant informed the plaintiff that he had “changed his mind” and “would not part with the car”. The plaintiff wants an order for specific performance. Advise the plaintiff. How would your answer change if the subject of the contract was not a car but a rare antique?

182 [3.760]

TOPIC 4 Sale of Goods Introduction.................................................................................... Application of the Sale of Goods Act .................................................... Classification of goods....................................................................... Transfer of property (ownership) between seller and buyer ....................... Delays in delivery and destruction of goods ........................................... Title of the buyer: passing ownership in goods ....................................... Delivery by the seller......................................................................... Acceptance by the buyer ................................................................... Stipulations as to time ....................................................................... Rights and remedies of the seller ......................................................... Romalpa clauses............................................................................... Personal Property Securities Act 2009 (Cth) ........................................... Remedies of the buyer....................................................................... Contractual terms: agreed by parties and implied by statute laws............... Implied conditions and warranties ....................................................... Auction sales ................................................................................... Does the common law imply conditions and warranties? .........................

[4.10] [4.30] [4.150] [4.210] [4.310] [4.320] [4.450] [4.460] [4.470] [4.480] [4.510] [4.545] [4.550] [4.560] [4.570] [4.710] [4.720]

Extract from Miles C and Dowler W, A Guide to Business Law (21st ed, Lawbook Co., 2015), Chapter 18 (including updates for 2016).

Terminology • Choses in action: personal property that has no physical form and is unable to be physically delivered; eg copyright in a book or shares in a company; • Choses in possession: personal property that has physical existence and material form; eg a car; • Condition: an important promise/statement in a contract; • Fixtures: personal property attached to land that becomes part of the land; • Future goods: goods that must be made or acquired by the seller after the agreement to sell has been made; • Implied conditions and warranties: terms read into a contract either at common law or by statute; ie conditions and warranties that are assumed to be part of the contract even without the parties’ consent; • Mercantile agent: an agent who is appointed to sell the goods belonging to others; • PPSR: Personal Property Securities Register; • Property: meaning “ownership” in the Sale of Goods Act; • Romalpa clause: a term in an agreement by which a seller retains ownership of the goods until paid for; 183

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• Specific goods: goods selected and agreed upon by the parties at the time of the contract; • Stoppage in transitu: preventing goods from being delivered to the buyer; • Unascertained goods: goods that have been purchased under a general description without being specifically identified; • Warranty: a less important promise/statement in a contract.

INTRODUCTION [4.10] The basic purpose of the Sale of Goods legislation in each State and Territory (collectively) is to assist in providing solutions to issues /problems associated with contracts involving the sale/purchase of goods. The Australian Consumer Law (which is Schedule 2 to the Competition and Consumer Act 2010 (Cth)) deals with consumer sales as well, however a broader application applies, which includes services. These Acts specify a variety of rules/principles relating to: 1.

the formation of contracts for sale of goods

2.

contents of contracts

3.

performance; and

4.

remedies/rights for breach.

Further details concerning the State and Commonwealth consumer laws may be examined in Topic 5.

The beginning of sale of goods legislation [4.20] Historically the law involved with contracts for sale of goods was common law based on principles developed in the United Kingdom courts. Eventually many of the common law principles were adopted into a statutory form called the Sale of Goods Act (UK). Over time each of the States and Territories passed their own legislation based on the UK model. • New South Wales: Sale of Goods Act 1923 • Western Australia: Sale of Goods Act 1895 • Victoria: Goods Act 1958 • South Australia: Sale of Goods Act 1895 • Queensland and Tasmania: Sale of Goods Act 1896 (Qld), Sale of Goods Act 1896 (Tas) • Australian Capital Territory: Sale of Goods Act 1954 • Northern Territory: Sale of Goods Act 1972. Originally all State /Territory laws required any contract for sale of goods of the value of $20 or more had to be in writing and signed before it was 184 [4.10]

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enforceable. However, apart from Western Australia and Tasmania this requirement has been repealed in all other States/Territories. In New South Wales, the Sale of Goods Act 1923 codified the common law, with some modifications. As the Acts were similar in each of the States and Territories, this area of the law is reasonably uniform throughout Australia. Parts not covered by the legislation are regulated by the common law that apply to contracts for the sale of goods This means that the law in New South Wales (and the other States/Territories) comprises both legislation and common law principles. In this Topic (unless stated otherwise) any reference to the Sale of Goods Act (the Act) shall mean the NSW legislation.

APPLICATION OF THE SALE OF GOODS ACT [4.30] It applies to all contracts for the sale of goods including: • commercial contracts between businesses in trade and commerce; and • consumer purchases from retailers such as clothing/electrical appliances. Does the Act apply to all contracts? No: the legislation is limited specifically to contracts concerned with the sale/purchase of goods.

How can a sale of goods contract be identified? [4.40] Section 6 of the Act (Sale of Goods Act 1895 (WA), s 1; Goods Act 1958 (Vic), s 6; Sale of Goods Act 1896 (Qld), s 4) defines a contract for the sale of goods as: [A] contract whereby the seller transfers or agrees to transfer the property (ownership) in goods to the buyer for a money consideration called the price.

If any contract for the sale of goods does not have the following essential features then the Act does not apply to it: • a contract (not simply an agreement); • the contract must involve a “sale” of some sort (between a seller and buyer); • “property” (ownership) is transferred at the time of the contract (a sale) or at a later time (agreement to sell); • “property” (ownership) of the goods is transferred to the buyer (not simply possession); • the subject matter of the contract must be “goods”; and • some “money” must be exchanged between the seller and buyer (not simply a barter or a gift).

Only contracts, not agreements are covered by the Act [4.50] Any agreement must contain all the essential elements of a contract. Simple agreements are not covered by the Act but only legal and valid contracts. [4.50] 185

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There must be some sort of a sale [4.60] The Act contemplates two different categories of contract: 1.

A contract of sale (an executed contract), where ownership of the goods passes to the buyer at the time of the contract;

2.

An agreement to sell (an executory contract), where ownership will pass to the buyer at a later time or subject to some condition.

Ownership is transferred: not simply possession [4.70] Parties must intend that ownership of goods is to pass to the buyer at some stage. Agreements that simply involve passing of possession are not contracts for sale of goods. Common examples of contracts excluded on this basis include: • hiring agreements eg DVDs; • lease /rental agreements eg hire cars; and • books/CDs from libraries.

Price: money must be part of the bargain [4.80] There must be some amount of money involved in the transaction. It does not have to be the full price or market value but must form a portion of the value being exchanged for the goods. Gifts or exchange of goods without money (barter) are not transactions to which the Act applies. The Act allows the price to be fixed by the contract or left to be determined by the parties in a manner agreed. Where the price is not determined in this way, the buyer must pay a reasonable price.

The subject matter of the contract must be “goods” [4.90] Section 5 of the Act defines the term “goods” as including all personal property known as “choses in possession” and also covers “emblements and things attached to or forming part of the land which are agreed to be severed (removed) before sale or under the contract of sale”. The best way to describe “choses in possession” is that they are types of personal property that have the following features: • material form/physical existence (tangible, ie can be touched and felt); • are able to be transferred from seller to buyer by delivery; and • ownership is commonly established by possession. Common examples of such goods are clothes, jewellery, electrical appliances, dvds, computers etc. The term “goods” covers a wide range of personal property and includes crops and timber (if sold after it has been cut down). In Symes v Laurie [1985] 2 Qd R 547 the sale of a completely relocatable house was recognised as a sale of goods (although generally real estate is excluded). 186 [4.60]

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What are not goods? [4.100] As mentioned above the Act has limited application. It does not affect any transaction that does not involve the sale of “goods”. Contracts to which the Act has no application include: 1.

Contracts for the sale of real estate (houses, units, vacant land, townhouses, factories, etc);

2.

Contracts for sale of “choses in action”, ie items of personal property that have no material form or physical existence and cannot be touched or felt by either seller or buyer. Proof of ownership of this type of personal property is usually by some form of documentation. Ownership of a chose in action is commonly transferred by documents (as delivery is not physically possible). Examples include copyright in a book, shares in a company, a share in a partnership business or a legal claim for a debt.

3.

Contracts to supply labour, employment or services;

Normally labour/services are not goods. Therefore contracts involving the sale of labour or services are generally not covered by the Act. The test is whether the primary objective of the contract is to transfer ownership of goods. If so, it is a contract for the sale of goods. If, however, the main purpose is the skill and experience to be displayed in performance by one of the parties, it is a contract for the supply of labour and materials. It is the main substance of the contract that the court considers. The fact that ownership of goods passes as a secondary effect of the contract is not relevant. For example, a plumber installing water pipes is performing under a contract for the supply of labour and materials. It is not a contract for the sale of goods just because the plumber, in performing, transfers ownership of the pipes to the owner of the building. Here the substance of the contract is the skill and labour of the plumber. Software which is purchased through the internet may not meet the definition of “goods” for the purpose of the protection provided by the implied conditions and warranties in the Sale of Goods Act 1923. However, the sale of a computer system may be treated as a sale of “goods” within the meaning of the legislation: see Toby Constructions Products Pty Ltd v Computer Bar Sales Pty Ltd [1983] 2 NSWLR 48. In Gammasonics Institute for Medical Research Pty Ltd v Comrad Medical Systems Pty Ltd (2010) 77 NSWLR 479; [2010] NSWSC 267 the respondent (Comrad) marketed a software package which assisted providers of health care services to manage their practices by electronic means. This included Medicare claim services. The appellant (Gammasonics) was a radiology service provider who purchased the Comrad software package electronically. Gammasonics was dissatisfied with the package claiming that it did not work and that the implied warranties of merchantable quality and fitness for [4.100] 187

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purpose had been breached. Gammasonics repudiated the contract for purchase of the software on this basis. Comrad successfully sued Gammasonics in the Local Court. Gammasonics appealed the Local Court decision arguing that software was a “good” under the Sale of Goods Act 1923 and that, as such, these “goods” were not of merchantable quality nor fit for their purpose. The Supreme Court considered the definition of software as a “good” and concluded that software purchased as a tangible and moveable item (such as a disc) was different from that purchased only electronically. On this basis, this software package purchased electronically was not considered a “good” for the purposes of the Sale of Goods Act 1923. Justice Fullerton acknowledged that this omission was a legislative problem to be addressed to ensure that consumers of software packages are not discriminated against by use of different delivery methods. Note that whilst the Australian Consumer Law (ACL) (see Topic 5) covers software in its definition of “goods”, purchase of software in a business context would not meet the definition of “consumer” under the ACL. Case study [4.110] In Robinson v Graves [1935] 1 KB 579, the plaintiff verbally agreed to paint the defendant’s portrait for £250. When the plaintiff attempted to recover payment, the defendant argued that the Sale of Goods Act (Eng) required contracts over a certain value to be in writing. As there was no evidence in writing, the contract was unenforceable. The court held that this was a contract for the supply of labour and materials, and not for the sale of goods. The primary objective of the contract, viewed objectively, was the skill and work of the artist. The sale of goods legislation did not apply and so the plaintiff was entitled to be paid. Note that if the defendant then resold the painting to a third party, this would be a contract for the sale of goods.

Case study [4.120] In Aristoc Industries Pty Ltd v RA Wenham Pty Ltd [1965] NSWR 581, a builder agreed to build a hall at a hospital. The plaintiff agreed, as subcontractor, to supply and install seats for the hall. The plaintiff made the seats but could not install them because of delays in completion of the building. The builder, in financial difficulties, assigned its rights under the building contract to the defendant. The argument was whether there was a contract for the sale of goods or whether the contract was for the supply of labour and materials. If it was a sale of goods, ownership of the seats passed under the contract to the defendant. The court held that the contract was for the supply of labour and materials. Ownership remained with the plaintiff sub-contractor until installation.

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Case study [4.130] In Toby Construction Products Pty Ltd v Computer Bar (Sales) Pty Ltd [1983] 2 NSWLR 48, the defendant agreed to sell to and install for the plaintiff a computer system that included both the hardware and software applications. The defendant also agreed to train the plaintiff’s staff in the use of the system and to provide after-sales service. The system did not work properly and the plaintiff sued. It was important to determine whether there was a contract for the sale of goods. The court applied the substantive purpose test and held, on the facts, that the contract was a contract for the sale of goods. Rogers J left open the question of whether a contract for the sale of software alone was a contract for the sale of goods. It is relevant in this case that the system was not a customised system.

In what ways does the Act regulate contracts for sale of goods? [4.140] The Act applies to contracts involving sale of goods in various ways including: 1.

It assists in determining when ownership of goods passes from the buyer to the seller. This is important as it decides when risk passes and also the type of remedies available to the seller and buyer if the contract is broken.

2.

It recognises the legal rights and obligations of both seller and buyer and provides remedies for both seller and buyer when there has been a breach of contract.

3.

It recognises the general rule (nemo dat) that a seller cannot sell what they don’t own and that a buyer cannot obtain any better ownership to goods than the seller had (this is designed to prevent sale of stolen goods). It provides exceptions to this rule and specifies limited situations where a buyer can obtain ownership of goods from a seller who may not be the true owner of goods.

4.

It protects the buyer (particularly where the buyer is a consumer) by implying a number of conditions and warranties (referred to as implied conditions and warranties) into most contracts for sale of goods. These conditions and warranties are read into the contract and assumed to be part of the contract even if the seller has not agreed to them. These implied terms are for the benefit of the buyer and impose obligations upon the seller. The buyer is given remedies in the event the seller breaches these implied terms. The implied terms only relate to the sale of goods and not services.

Note that the ACL (see Topic 5) provides warranty protection for services. This protection will be discussed in more detail in that Topic. [4.140] 189

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CLASSIFICATION OF GOODS [4.150] The Act refers to and defines different categories of goods.

Existing goods [4.160] These are goods that are owned and possessed by the seller when the contract is made.

Specific goods [4.170] Specific goods are goods that “are identified and agreed on at the time a contract of sale is made”: s 5. Here the parties, at the moment of contract, know and have agreed upon the subject matter of the contract, eg purchase of an item at a shop.

Unascertained goods [4.180] These are goods not yet identified by the parties as being the subject matter of the contract. That is, the goods are described in general terms only and are not yet able to be appropriated to the contract. Ownership (property) in these types of goods will not pass until that occurs, eg buying one tonne of sand from a silo containing 10,000 tonnes; or negotiating to buy 10 boxes of tinned salmon contained in the seller’s cool-room containing numerous boxes of all types of tinned salmon, tuna and sardines.

Ascertained goods [4.190] Where in a contract for the sale of unascertained goods, the parties then agree which goods are to be the subject of the contract, the goods become ascertained: they are appropriated to the contract, eg in the above example, if the buyer selects and loads on his truck a tonne of sand out of the silo containing 10,000 tonnes; or the seller notifies the buyer the boxes of tinned salmon have been set aside and the buyer collects them.

Future goods [4.200] Future goods are “goods to be manufactured or acquired by the seller after the making of the contract of sale” (s 5); eg ordering a lounge suite that has to come from the seller’s warehouse in Adelaide in three weeks’ time.

TRANSFER OF PROPERTY (OWNERSHIP) BETWEEN SELLER AND BUYER [4.210] In this context, property means ownership or title and possession refers to the custody or control of the goods. There is a need to determine the exact time when ownership or property in goods passes from seller to the buyer for several reasons: • when ownership passes, risk also passes; and 190 [4.150]

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• a person who has title to goods can pass on that title to a third party. Sections 5, 6, 10, 22 and 23 of the Act set out the guiding principles for the transfer of ownership. There are two general rules about the passing of ownership to the buyer: 1.

2.

Section 22: In a contract for the sale of specific goods, ownership passes at the time when the parties intend. We discover intention by looking at the terms of the contract, the conduct of the parties and all the surrounding circumstances. Section 21: In a contract for the sale of unascertained goods (really an agreement for sale), ownership cannot pass unless and until the goods have become ascertained; ie ownership remains with the seller as long as the goods are unascertained. When the goods have been selected and identified then they become “ascertained” and ownership can pass to the buyer.

Case study [4.220] A good example of how this latter rule operates can be seen in the case of Wardar's (Import & Export) Co Ltd v Norwood [1968] 2 All ER 602 The seller sold a quantity of kidneys to the buyer. The kidneys were frozen and contained in cartons. The cartons were stored in the seller’s cold-storage room which also contained numerous other cartons/boxes of frozen foods. The seller gave the buyer’s carrier an authority to collect the cartons of kidneys from storage. The carrier went to the storage depot and loaded the goods, which had been left outside by the seller for collection. At one stage whilst loading the cartons, the carrier noticed some of the cartons were dripping. Unfortunately, the carrier did not switch on his refrigeration until later the same day. The goods arrived at their destination in a damaged state and unfit for consumption. The plaintiff sued for damages claiming the seller had breached the implied condition of “merchantable quality” and the seller cross-claimed against the plaintiff for the price of the kidneys. The main issue was who owned the goods when they were damaged. The Court of Appeal decided that there was a contract for the sale of “unascertained goods”. The seller had appropriated the goods to the contract by selecting them and leaving them outside the cold-storage depot. Ownership (property) in the cartons of kidneys passed to the plaintiff when the carrier handed over the delivery note at the cold-storage depot and began loading the goods. At this time, it appeared to the carrier that the kidneys were in good condition. As a result, the plaintiff owned the goods at that time and the damage was caused after this. The plaintiff was liable to pay the seller for the price of the kidneys. It was the plaintiff’s own carrier that caused the damage by not correctly refrigerating the goods during delivery. Accordingly, the seller had not breached the implied condition of merchantable quality.

[4.220] 191

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[4.230] A seller who delivers the goods to a buyer or to a carrier for transmission to the buyer and does not reserve the right of disposal is considered to have appropriated the goods to the contract.

Statutory rules about transferring ownership of goods [4.240] The Act sets out certain sub-rules for determining when property passes, unless the parties intended otherwise. This means the parties are free to agree on when ownership in the goods shall pass to the buyer. In the event this has not occurred or it is unclear or disputed then the Act has specific rules that can be applied by a court to determine when ownership passed from the seller to the buyer.

Rule 1 [4.250] Where there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment or the time of delivery, or both, be postponed. It does not require much to make a contract conditional. In Minister of Supply v Servicemen’s Cooperative Ltd (1951) 82 CLR 621, a seller sold specific goods, “cash before delivery”. The court held that this made the contract a conditional contract.

Rule 2 [4.260] Where there is a contract for the sale of specific goods and the seller is bound to do something to the goods for the purpose of putting them in a deliverable state, the property does not pass until such thing be done and the buyer has notice thereof. The Act states that goods are in a deliverable state when “the buyer would under the contract be bound to take delivery of them”. In the past the courts have interpreted the rule narrowly. Modern practice as to packaging places a different emphasis on “deliverable state”.

Rule 3 [4.270] Where there is a contract for the sale of specific goods in a deliverable state, but the seller is bound to weigh, measure, test or do some other act or thing with reference to the goods for the purpose of ascertaining the price, the property does not pass until such act or thing be done and the buyer has notice thereof.

Rule 4 [4.280] Where goods are delivered to the buyer on approval or on sale or return or other similar terms, the property in the goods passes to the buyer in either of the following situations: 192 [4.230]

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• the buyer signifies approval or does anything “adopting the transaction”; or • the buyer, without rejecting the goods, retains them beyond the time given or, if no time is given, beyond a reasonable time.

Rule 5 [4.290] Where there is a contract for the sale of unascertained or future goods by description and goods of that description and in a deliverable state are unconditionally appropriated to the contract either by the seller with the assent of the buyer or by the buyer with the assent of the seller, the property in the goods passes to the buyer. Such assent may be express or implied, and may be given either before or after the appropriation is made. Case study [4.300] In Pignatoro v Gilroy [1919] 1 KB 459, the defendant sold “140 bags of [a selected brand] of rice” to the plaintiff. The seller subsequently notified the buyer that the rice could be collected from a certain place. The buyer did not attempt to collect the rice for four weeks. Meanwhile, someone stole the rice. The court held that ownership and risk had passed to the buyer. The buyer, by failing to object to the appropriation within a reasonable time, had consented to it by implication.

DELAYS IN DELIVERY AND DESTRUCTION OF GOODS [4.310] Section 3 of the Act provides that where delivery has been delayed through fault of either the buyer or the seller, the goods are at the risk of the party at fault as regards any loss that might not have occurred except for such fault. Section 11 of the Act provides that where there is a contract for the sale of specific goods and the goods, without the knowledge of the seller, have perished at the time when the contract is made, then the contract is void. Where there is an agreement to sell specific goods and subsequently the goods, without any fault by the seller or buyer, perish before the risk passes to the buyer, the agreement is void. Where a contract is made for unascertained goods and the stock from which a seller intended to fulfil this contract has perished at the time of the contract, the contract is not void. The seller must find identical goods to supply or pay damages for non-delivery.

TITLE OF THE BUYER: PASSING OWNERSHIP IN GOODS [4.320] There is a legal principle both at common law and specified in the Sale of Goods Act 1923 itself that prevents a person who may not be the owner of goods from selling them. The principle is called the nemo dat rule and the legal consequence of this rule is that where a seller of goods has no legal ownership [4.320] 193

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to them or for some reason their ownership is defective, then a buyer of the goods cannot obtain any better ownership to the goods than the seller had. In effect, the buyer purchases such goods subject to defects in ownership. This is more a principle of common sense in its recognition that a seller is normally unable to sell goods they don’t own. A common example is where a thief steals goods and then sells the goods to a buyer. Even if the buyer acted honestly and was unaware of the theft they cannot get better ownership to those goods than the thief. As a result, the legal owner could recover the goods from the buyer as they had defective ownership. The buyer could take legal action against the thief (if located). Whilst the Act recognises this principle, it has allowed a number of exceptions to it. This means that if a court recognises a contract for sale of goods as being one of the “exceptions” nominated in the Act, then the purchaser may obtain legal ownership of the goods free of defects.

Sale of Goods Act: exceptions to the nemo dat rule [4.330] There are a number of exceptions to the nemo dat rule under the Act: • estoppel; • sale by a mercantile agent; • sale under voidable title; • sale by seller in possession of goods after sale; • sale by buyer in possession of goods after sale; and • sale under common law or statutory power.

Estoppel [4.340] The concept of estoppel occurs frequently in common law, often in the law of contract. In simple terms, it means that a person’s conduct or omissions will prevent him or her from claiming or exercising his or her normal rights. Applying this to sale of goods law, the owner of goods who, by words or conduct, causes a third party to believe that another person has the right to sell the goods cannot deny that other party’s right to pass on title. This is an example of estoppel. Case study [4.350] In Leonard v Ielasi (1987) 46 SASR 495, the plaintiff had permitted an acquaintance to register her car in his name. This assertion of ownership allowed the acquaintance to sell it to the defendant and the plaintiff was estopped from objecting to the sale. The negligent action of allowing the transfer of registration led to an assumption in law of ownership in favour of the defendant.

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Sale by a mercantile agent [4.360] A mercantile agent is a person who sells goods entrusted to his or her possession or control. Another word for mercantile agent is factor. Common forms of mercantile agents are auctioneers and persons who sell goods on consignment. Legislation such as the Factors (Mercantile Agents) Act 1923 (NSW) (see s 5 – powers of mercantile agent) generally allows a mercantile agent who has possession of goods or documents of title with the owner’s consent to pass good title to a bona fide purchaser even where the sale is unauthorised. The transaction must be one in the ordinary course of business. There is similar legislation to this in the other States and Territories. Case study [4.370] In Folkes v King [1923] 1 KB 282, Folkes delivered his car to a mercantile agent to sell at a specified minimum price. The agent sold the car to King at less than the specified price, collected the proceeds and disappeared. Folkes sued King, who had no notice of the lack of authority, for the return of the car. The court held that title had passed to King; Folkes’ only legal remedy was to pursue the agent for damages.

Sale under voidable title [4.380] The Act allows a buyer who acquires goods under a voidable title to retain title against claims of the original owner. A voidable title will generally arise from a voidable contract. A contract is voidable where there is a unilateral mistake as to identity, misrepresentation, duress, undue influence, and sometimes where the contract is unconscionable. Of particular relevance are the cases of Phillips v Brooks [1919] 2 KB 243 and Lewis v Averay [1972] 1 QB 198.

Sale by a seller in possession of goods after a sale [4.390] The Act provides that if the buyer of goods to whom ownership has already passed leaves the goods with the seller, a subsequent sale by the seller to a genuine third party passes ownership to the third party. For example, Farrah buys and pays for specific goods from Shifty Discounts. Farrah asks Shifty if she can leave the goods pending arrangement for storage. By mistake, not knowing that the goods have been sold, an employee of Shifty sells the goods to a third party. Farrah cannot recover the goods from the third party because title has passed. Farrah can, however, sue Shifty for damages. Case study [4.400] In Pacific Motor Auctions Pty Ltd v Motor Credits (Hire Finance) Pty Ltd (1965) 112 CLR 192, M, a car dealer, was financed by the respondent finance company under a floor plan scheme. M bought cars and sold them to the [4.400] 195

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respondent for 90% of the purchase price, retaining possession of the cars for display for resale purposes. The respondent, because of M’s financial problems, told M not to resell any more cars. M sold several of the cars to the appellant, claiming ownership of the cars. The respondent sued the appellant for the return of the cars. The court held that the appellant bought the cars in good faith from a seller in possession of goods after the sale. Title had passed to the appellant.

Case study [4.410] In Mercantile Credits Ltd v F C Upton & Sons Pty Ltd (1974) 48 ALJR 301, S was the owner of farm machinery and sold it to the appellant finance company. The appellant then leased it to a company associated with S and occupying the same premises as S. S subsequently sold the machinery to the respondent third party for value. This was a sale by the seller remaining in possession after the sale and title had passed to the respondent third party. The High Court held that the rule above will only operate where there is no interruption to the possession of the seller. Here it could be said that there was continuous possession.

[4.420] Section 50(2) of the Act provides as follows: Where an unpaid seller who has exercised his right of lien or stoppage in transitu resells the goods, the buyer acquires a good title thereto as against the original buyer.

A lien is a right to retain possession of the goods until payment by the buyer; stoppage in transitu is stoppage in transit. In certain circumstances a seller can retain possession of goods, or recover them in the course of carriage, even though ownership seems to have passed to the buyer. This section allows a seller who has exercised these rights to pass on good title to a third party.

Sale by the buyer in possession of goods after sale [4.430] The Act also specifies that a buyer in lawful possession of goods with the seller’s consent can pass good title to a bona fide third party and defeat any rights that the seller may still have in the goods, even when title has not passed to the buyer.

Sale under common law or statutory power [4.440] The Act preserves the right of sale under a common law power of sale, such as that of the pledgee of goods, or a statutory power of sale. For example the Official Trustee in Bankruptcy, or any trustee of a bankrupt person, never acquires title to property in a bankrupt estate. However under the Bankruptcy Act 1966 (Cth) he or she may pass good title to a purchaser where goods are realised for the benefit of creditors. 196 [4.410]

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The disposal of uncollected goods statutes in various States and Territories (Uncollected Goods Act 1995 (NSW), Disposal of Uncollected Goods Act 1961 (Vic), Disposal of Uncollected Goods Act 1967 (Qld), Disposal of Uncollected Goods Act 1970 (WA), Uncollected Goods Act 1966 (ACT), Unclaimed Goods Act 1987 (SA), Disposal of Uncollected Goods 1968 (Tas), Uncollected Goods Act (NT)) allow for the disposal of certain goods by a trader provided specific criteria are met. There is also more specific legislation relating to the disposal of goods held by a pawnbroker (eg the Pawnbrokers and Second Hand dealers Act 1966 (NSW), s 30), goods left by a tenant (eg the Residental Tenancies Act 1987 (NSW), Div 2) and goods left by a resident of a retirement village (eg the Retirement Villages Act 1999 (NSW), ss 146–48).

DELIVERY BY THE SELLER [4.450] Delivery in this context means the voluntary transfer or handing over of goods by the seller to the buyer. It is normally the obligation of the seller of goods, under a contract for the sale of goods, to carry out delivery, and rules as to delivery have evolved over the years, subject to whether the parties agree otherwise. The Act in effect codifies these rules. The following rules as to delivery apply in the absence of agreement otherwise by the parties. Agreement either may be express or implied from the circumstances surrounding the agreement. • The usual place for delivery is the place of business or the residence of the seller, but in the case of specific or ascertained goods known by the parties to be elsewhere, that other place is the proper place for delivery. • The seller has a duty to put the goods into a deliverable state but it is the obligation of the buyer to take the goods rather than that of the seller to deliver them. • If a time is specified for delivery then the seller must effect delivery within that time but if no time is specified delivery must be within a reasonable time. • The buyer can only demand delivery to be within reasonable hours of the day. • The expenses of delivery are normally to be borne by the seller. • Subject to usage and trade custom, the seller must deliver goods in the quantities agreed. If a lesser quantity is delivered, the buyer can reject the goods or accept them and pay at the contract rate. If a greater quantity is delivered, the buyer may accept the correct quantity and reject the rest, or accept the extra goods and pay for them at the contract rate. If the goods are delivered mixed in with non-contract goods, the buyer may reject the delivery in full or accept the contract goods and reject the others.

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ACCEPTANCE BY THE BUYER [4.460] As with delivery by the seller, there are specific rules that apply to acceptance by the buyer in the absence of express or implied agreement between the parties, some of which are codified in the Act. Acceptance in this context relates to the performance by the buyer under the contract and/or the passing of property in the goods: • The buyer must accept goods that conform to the contract and pay for them. • The buyer is considered to have accepted the goods in any one of the following situations: (a)

when the buyer informs the seller, expressly or by implication, that the goods have been accepted;

(b)

where the buyer, after delivery of the goods, does anything in relation to them inconsistent with the seller’s ownership; or

(c)

where the buyer keeps the goods and fails within a reasonable time to inform the seller of their rejection.

• The buyer should be given a reasonable opportunity to examine the goods before being considered to have accepted them. • The buyer can reject the goods where the seller is in breach of a condition of the contract, or where there has been a serious breach of an intermediate term. • Upon rejection for proper reasons, the buyer must notify the seller of the rejection but does not have to return the goods to the seller. The buyer can charge for removal and storage if the seller fails to collect them after a reasonable time.

STIPULATIONS AS TO TIME [4.470] Generally at common law, a stipulation as to time is not an essential term of a contract unless the parties expressly, or by implication, make it so. The form commonly used to make a stipulation as to time a condition of the contract is to use the words “time is of the essence”. Where time is not of the essence, a party can usually make it so by requiring the other party, on reasonable notice, to complete by a certain time. What is reasonable notice depends on the circumstances. The Act says that, unless the parties intended differently, a stipulation as to time of payment is not an essential term. This section only applies as to time for payment. The question of whether other time stipulations are essential depends upon a reading of the contract. The courts generally consider time for delivery of perishable goods to be of the essence.

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RIGHTS AND REMEDIES OF THE SELLER [4.480] The main concern of any seller is for the buyer to take delivery of the goods and to pay for them. The seller may, depending upon the circumstances, have rights both against the buyer and against the goods themselves.

Rights of the unpaid seller against the goods [4.490] Rights of the unpaid seller against the goods are: • the seller can withhold delivery of the goods (where ownership and possession are with the seller); • the seller has a right of lien over the goods until paid (where ownership has passed to the buyer but the seller still has possession); • where the buyer has become insolvent, the seller has the right to stop the goods in transit; and • where possession is with the seller the seller may be able to resell the goods if they are perishable or after giving reasonable notice to the buyer.

Rights of the unpaid seller against the buyer [4.500] Rights of the unpaid seller against the buyer are: • where ownership has passed, to sue the buyer for the price; and • to sue for damages for non-acceptance of the goods. The normal rules as to damages apply but the Act prima facie sets the damages for non-acceptance by the buyer. Where there is an available market, damages are prima facie the difference between the contract price and the market price at the time when the goods should properly have been accepted.

ROMALPA CLAUSES [4.510] The seller can, in the contract of sale, make special provision by using a retention of title clause. This is a clause that specifically reserves the rights of the seller and which gives the seller the rights to trace the goods to recover payment. The clause has become generally known as a “Romalpa Clause” as a result of the following case study. Case study [4.520] In Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676, a contract for the sale of aluminium expressly provided that ownership would not pass until payment. The contract secured against payment any products made from the aluminium. The buyer became insolvent while still owing money to the seller. The question was whether the seller was entitled to the proceeds of the sale of products made with the aluminium sold. The court held that the contract had created a fiduciary relationship between the parties. The seller was entitled to the proceeds.

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[4.530] However, there are limits to the use of such clauses. Case study [4.540] In CSR Ltd v Casaron Pty Ltd [2002] QSC 21, the Supreme Court of Queensland examined the supply of building materials under a contract containing a clause where the seller retained ownership in the goods and under which the seller sought to trace any proceeds of sale of the supplied goods or the products made from them. The building materials were subsequently used in building/construction works and the court held that ownership has passed once such materials had been incorporated into the building works. As a result, the Romalpa clause was invalid.

PERSONAL PROPERTY SECURITIES ACT 2009 (CTH) [4.545] In late 2009 the Federal Government introduced the Personal Property Securities Act 2009 (Cth) (PPS Act), the purpose of which was to introduce a national regime for the registration of security interests over personal property. This involved the establishment of the Personal Property Securities Register (the Register): see http://www.ppsr.gov.au. The Register is administered by the Australian Financial Security Authority (AFSA) who were formerly the Insolvency and Trustee Service Australia (ITSA). The new name reflects the greater scope of the responsibility of this Federal Government Authority: http://www.afsa.gov.au. Section 12 of the PPS Act defines “security interests” and this also would appear to include a retention of title (ROT) clause. This leads to the question of how would a ROT clause then protect the interests of a supplier? A “security interest” under s 12 of the PPS Act includes the normally expected forms of security such as mortgages or charges, but it also includes some transactions one would not normally think to be a standard security interest. These include contracts whereby a purchaser is in possession of property but has not paid the full purchase price for that property. The seller retains the title until that occurs. This right is included within the lending agreement. Under the PPS Act, ROT sellers or suppliers will become secured parties with a security interest in the subject property and will have a “purchase money security interest” (PMSI). This elevates a PMSI seller to a higher status relative to other interests. Under the PPS Act, ROT suppliers enjoy the benefit of what is known as PMSI super priority. This means that a registered security interest of a ROT supplier takes priority over all other, including earlier, security interests in the collateral where the requirements of the PPS Act have been complied with. 200 [4.530]

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This of course means attending to registration procedures under the PPS Act. Also this would extend protection to ROT suppliers from claims on property by a trustee in bankruptcy. The Corporations Act 2001 (Cth), s 51F extends the concept of a ROT clause to property of a corporation, but which is subject to such a clause, protecting the property from a liquidator. Being practical, and as it is new legislation, there is awareness that it may need to be amended from time–to–time to address additional issues that arise. For example, on 1 October 2015, s 13(1)(e) of the PPS Act (Cth) was repealed. This section deemed leases of serial numbered goods, such as motor vehicles, aircraft, watercraft and other items, to be PPS leases for the purposes of the Act if they have a term of 90 days or more. But from 1 October 2015, businesses which lease out serial numbered goods for 90 days or more but for less than a year, no longer need to record these transactions on the Personal Property Securities Register. PPS lease rules relating to leases of one year or more, or of an indefinite term, remain unchanged regardless of whether the goods are serial numbered (adapted from http://news.ppsr.gov.au/1-october-2015-90day-lease-rule-amendment-of-pps-act-commences). Registration is of course key to protection against liquidator claims on the property for creditors. Further information can be found at: http:// www.ppsr.gov.au/register-security-interests.

REMEDIES OF THE BUYER [4.550] The main concerns of any buyers are that the seller shall supply/ deliver the goods as promised and that the goods shall be of the required standard/comply with description. The remedies of the buyer are: • Termination (rejection) of the contract of sale where there has been a breach of a condition (assuming ownership has not passed). Note, however, that the passing of property in specific goods will not of itself bar rejection of those goods by the buyer. • Damages for non-delivery of goods. • Damages for breach of warranty of quality, ie the goods are not fit for purpose or are not of merchantable quality. • Specific performance (court order to complete sale of goods) but only where the goods are unique or have a special significance and damages are not an adequate remedy.

CONTRACTUAL TERMS: AGREED BY PARTIES AND IMPLIED BY STATUTE LAWS [4.560] Parties may include various terms in their contracts for sale of goods. As mentioned in Chapter 8 (Miles) “conditions” are important terms that give the innocent party the right to terminate the contract and or claim damages. [4.560] 201

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A “warranty” is a term that has less importance and a breach of which only allows the innocent party the right to claim damages (no right to terminate the contract and reject the goods). In NSW the Act identifies another term called the “intermediate term” that is somewhere between a condition and warranty. Section 4(5) states that a contract for sale can be terminated for a sufficiently serious breach of an intermediate term. Whether a term in the contract for sale of goods is a condition or warranty is a matter of construction and a term may be determined as a condition although called a warranty and vice versa. Whilst parties are free to make specific conditions and warranties part of their agreement the Act “implies” certain conditions and warranties into all contracts for the sale of goods. These terms were designed to offer some statutory protection for the buyer by having such terms become part of the contract by implication. Usually the implied conditions and warranties are not negatived by any express provision in the contract that the parties agreed to unless they are inconsistent with each other (in which case the express provisions made by the parties will prevail). The Sale of Goods Act 1923 implies into contracts for sale of goods various important terms unless the agreement shows a clear and obvious different intention. The terms that are implied by the Act (in all States/Territories) relate to: • title; • correspondence of goods with description; • quality (merchantable quality); • fitness for purpose; and • correspondence with sample. Where an implied condition is broken the buyer may terminate the contract for sale (reject the goods) and /or claim damages Where an implied warranty has been breached the buyer may be limited to claiming damages only. However, where a seller is required to comply with a condition the buyer may waive the condition and choose to treat the breach of condition as simply a breach of warranty and continue with the contract eg where the seller wrongly delivers goods that do not correspond with description.

IMPLIED CONDITIONS AND WARRANTIES [4.570] Under the Act there are two warranties and five implied conditions. These are: • section 17: implied conditions and warranties as to title; • section 18: an implied condition of correspondence with description; • section 19(1): an implied condition of fitness for a particular purpose; 202 [4.570]

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• section 19(2): an implied condition of merchantable quality; and • section 20: implied conditions in a sale of goods by sample.

Implied condition as to title (ownership) [4.580] Section 17 of the Act provides that in every contract of sale, there is: (1)

an implied condition on the part of the seller that in the case of a sale he or she has a right to sell the goods, and that in the case of an agreement to sell, he or she will have a right to sell the goods at the time when the property is to pass;

(2)

an implied warranty that the buyer shall have and enjoy quiet possession of the goods; and

(3)

an implied warranty that the goods shall be free from any charge or encumbrance in favour of any third party not declared or known to the buyer before or at the time when the contract is made.

Case study [4.590] In Patten v Thomas Motors Pty Ltd [1965] NSWR 1457, the hirer (buyer) of a car under a hire-purchase agreement purported to sell it to a dealer. The dealer in turn resold the car. Eventually, the defendant bought the car and sold it to the plaintiff. The car was repossessed by the original finance company from the plaintiff. After the plaintiff had purchased the car, the original hirer obtained finance on the security of the car. This was done after the hirer sold the car. The hirer used the loan to pay out the original hire-purchase company. The plaintiff sued the defendant for breach of the implied condition as to title. The court held that when the hirer paid out the original hire-purchase company, she acquired title to the car. This acquisition of title fed the title retrospectively. All purchasers, including the plaintiff, then obtained legal title.

Implied condition of correspondence with description [4.600] Section 18 of the Act provides that where there is a contract for the sale of goods by description, there is an implied condition that the goods must correspond with their description. If it is also a sale by sample, the goods must correspond with both the sample and the description. The problem here is to define a sale of goods by description. Quite clearly, the sale of a “Brand X 34 cm colour television set in teak panelling with remote control” is a sale by description, but the phrase has a broader meaning than this. The test appears to be that there is a sale by description wherever words are used to identify the goods to the buyer. In Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441, Lord Diplock said that the key to the section was identification. He concluded that a sale by description was confined to those words in the contract, which were intended by the parties to identify the [4.600] 203

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kind of goods which were intended to be supplied by the seller to the buyer. It could also mean descriptive phrases applied to goods must be accurate in relation to those specific goods. In Reynolds v Turner [1967] 1 WLR 1193 the words “low kilometres” written across the windscreen of a vehicle in a car yard clearly implied that the odometer reading on that particular vehicle would be comparatively low given the age of the vehicle. The court held that the buyer was entitled to rescind the contract on the basis that the seller had breached the implied condition of correspondence with description. Even where goods are sold by a brand name, or where the buyer is buying things on display, there can be a sale by description. In the appropriate circumstances even time, place or route of shipment may be part of the description, non-conformity with which will render the goods liable to rejection by the buyer.

Implied condition of fitness for a particular purpose [4.610] Under s 19(1) of the NSW Act (Sale of Goods Act 1895 (WA), s 14(i); Sale of Goods Act 1896 (Qld), s 17(a); Sale of Goods Act 1895 (SA), s 14(a) – (d) and Sale of Goods Act (NT), s 19(a) – (d)) there are no implied warranties and conditions about fitness for purpose unless certain criteria have been satisfied: • the buyer must tell the seller the purpose for which the goods are required – this may be by express words or by implication but where goods have only one possible purpose there is no need for the buyer to spell it out; • there must be reliance on the seller’s skill or judgment, expressly or by implication – the courts will normally infer this reliance in a sale of goods by a retailer, wholesaler or manufacturer; and • the goods must be of a kind that are in the course of the seller’s business to sell. If the buyer specifically requests the supply of goods under its patent or trade name this condition does not apply. The condition implied under the above sections is that the goods shall be reasonably fit for the purpose for which they were bought. The seller is treated as making a promise that their goods are reasonably fit for their purpose. The goods do not have to be perfect. The standard of fitness for purpose implied is that which a reasonable person would expect. Case study [4.620] In David Jones Ltd v Willis (1934) 52 CLR 110, Willis attended David Jones Ltd (retail store) and asked the saleswoman in the shoe department to show her some “walking shoes” and in addition she informed the seller that she wanted a shoe that would come over her bunion and be comfortable to wear. She was presented with three pairs from which she made her selection. She wore the shoes only three times and on the third occasion whilst she was walking, the 204 [4.610]

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heel became detached from one of her shoes causing her to fall and break her leg. She commenced legal action against David Jones to recover damages for her personal injuries. She based her claim on breach of contract (rather than negligence) and relied on s 19(1) of the Sale of Goods Act 1923 (NSW). She claimed that she had purchased goods by description from a seller of those types of goods and had made known the purpose for the goods and had relied on the seller’s skill and judgment. Therefore, the Sale of Goods Act 1923 implied into the contract a condition that the goods were reasonably fit for such purpose. She also claimed that she had bought the shoes by description from a seller who deals in those goods and as such there was an implied term that the goods were of “merchantable quality” under s 19(2) of the Act. The jury found that the heel came off owing to a defective and improper condition of the shoe and this amounted to a breach of the implied conditions of “fitness for purpose” (s 19(1) and “merchantable quality”: s 19(2)). On appeal to the High Court of Australia, David Jones argued that there was no breach of these implied terms. The real question of general importance for the High Court was whether, when a retailer sold goods in the ordinary manner in his shop, he would be liable under either s 19(1) and (2) of the Sale of Goods Act 1923 for the consequences of defects in the goods which made them improper for use. The court recognised it was common knowledge that “retailers” of shoes like David Jones were rarely the “manufacturers”. Buyers did not always rely on the seller’s skill and judgment for each and every article that was being sold. However, buyers do rely upon the judgment of the shopkeeper in stocking their shops with goods made by factories (with a reputation for honest and careful work and the use of sound materials) and for their general skill or judgment in supervising and checking the goods which pass through their hands. The court agreed that on the evidence, the contract was a sale by description (walking shoes) and the jury had been entitled to find that Willis had made known to the saleswoman that she required the shoes for “outdoor walking” so as to show that she relied on the seller’s skill and judgment. The condition of the shoe was such as to make it altogether unfit for any reasonable use. There was plenty of evidence which would allow a jury to find that the shoe was so defective as not to be of merchantable quality and as to be unfit for the purpose of walking – in breach of both s 19(1) and (2).

[4.630] The reliance upon the seller’s skill and judgment is a crucial part of the implied condition as Gibbett v Forwood Products Pty Ltd [2001] FCA 290 shows. In this case an exporter bought wood shavings from a timber mill for the stated purpose of packing around live crayfish that were being exported. The shavings were later shown to be chemically contaminated. However, the exporter failed in his action against the timber mill, because he was demonstrated to have known more about exporting live crayfish than the timber mill. In any case, the exporter could not show that he acted in reliance upon the timber mill’s skill and judgment. The exporter had simply asked for [4.630] 205

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clean wood shavings without any other instructions; and that is what the timber mill believed they had supplied.

Implied condition of merchantable quality [4.640] Section 19(2) of the NSW Act (Sale of Goods Act 1895 (WA), s 14(ii) and Sale of Goods Act 1896 (Qld), s 17(c)) states that where goods are bought by description from a seller who deals in such goods there is an implied condition that the goods shall be of “merchantable quality”. The condition applies irrespective of any lack of fault by the seller. In each statute the following criteria must be satisfied before this condition applies: • the sale must be a sale by description; and • the seller must be a seller who deals in goods of that description. Also s 19(2) of the NSW Act, s 14(ii) of the Western Australian Act and s 17(d) of the Queensland Act provide that where the buyer has examined the goods there shall be no implied condition as regards defects which such examination ought to have revealed. In Grant v Australian Knitting Mills [1936] AC 85 (see Topic 6 and [4.650] below), Dixon J examined the question of what makes a sale by description and suggested that where things are sought or chosen by a buyer because of their description and when the reason for selection or identification is their correspondence to a description then there is a sale by description. There have been many attempts by the courts over the years to define “merchantable quality”. Section 64(3) of the Act gives a non-exclusive definition of merchantable quality but only in the context of a consumer sale. That definition is: Goods are not of merchantable quality if they are not as fit for the purpose or purposes for which goods of that kind are commonly bought as is reasonable to expect having regard to the price, to any description applied to them by the seller and to all other circumstances.

In Cammell, Laird & Co v Manganese Bronze & Brass Co [1934] AC 402, Lord Wright described “unmerchantable quality” as meaning that the goods sold were of no use for any purpose for which such goods would normally be used and as a result were not saleable under their description. This implied condition only applies to defects in goods that are not capable of being discovered from any reasonable inspection or examination by the buyer. In some situations if the buyer carries out an inspection they cannot hold the seller liable for any defects that were or should have been discovered. Case study [4.650] In Grant v Australian Knitting Mills [1936] AC 85, Dr Richard Grant bought two woollen singlets and two pairs of long johns from a store in Adelaide, South Australia. The underwear contained an excess of a chemical 206 [4.640]

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treatment (sulphites) which reacted with Grant’s skin and gave him severe dermatitis. It affected his entire body except the soles of his feet and the palms of his hands. He spent nearly four months bedridden. Grant’s case involved a claim by Grant against AKM (the manufacturer) in negligence and examined the liability of a manufacturer in the tort of negligence. (This aspect of the case is covered in the case study in Topic 6.) In addition, Grant claimed against the retailer for damages for breach of contract and relied on the implied conditions under s 14(1) and (2) of the South Australian Sale of Goods Act 1895 where there were implied conditions of fitness for purpose and merchantable quality. This portion of the case study is limited to the implied conditions under the Act. The case went on appeal to the High Court of Australia. Evatt J adopted the view that Grant made a contract over the shop counter where he requested and selected underwear from samples produced by the shop and so there was an implied condition of fitness for ordinary wear and an implied condition of merchantable quality. The court held that the goods were not of merchantable quality and were not fit for the purpose for which they were sold. Underwear has only one purpose and any examination of the underwear would not have revealed its defects. Dixon J was of the opinion that merchantable quality referred to reasonably sound goods that were in such a state that a buyer who was fully informed about the facts and being aware of any hidden defects would buy the goods without reduction in price. The court gave judgment against the retailer on the contract of sale. The manufacturer appealed to the Privy Council. Lord Wright commented that goods were not merchantable simply because they looked all right. If goods have a defect that was not apparent on ordinary examination which made them unfit for proper use then the goods were not of merchantable quality. The implied condition about merchantable quality only applied to defects not reasonably discoverable to the buyer on examination. On the facts, Grant was satisfied with the goods and could not detect (and had no reason to suspect) the presence of harmful chemicals in the material. The underwear was saleable in the sense that anyone (unaware of the defects) would readily buy them. However, they were not of merchantable quality in the statutory sense because the defect made them unfit to be worn next to the skin. The court agreed that the retailer was liable under the contract for breach of both implied conditions of fitness for purpose and merchantable quality and in cases of this type produced the same result.

[4.660] It seems that the test is what a reasonable person would expect from the goods, having regard to their price, type, purpose and the understanding of the parties. Obviously, a reasonable person would have different expectations from a Rolex watch costing $30,000 and a watch bought at the local service station for $15.95.

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Case study [4.670] A case illustrating the requirements for merchantable quality and fitness for purpose is Liaweena (NSW) Pty Ltd v McWilliams Wines Pty Ltd [1991] ASC 56,616 (56-038). The plaintiff winemaker claimed that corks sold by the defendant were contaminated and as a result wines sealed with those corks became unfit for sale. The plaintiff sought damages for breach of the implied promises of merchantable quality and fitness for purpose. The court concluded the goods were not fit for their purpose. The buyer had relied on the defendant’s skill and judgment. The trial judge said that to satisfy a breach of fitness it was sufficient if a reasonable person in the circumstances would have realised that the buyer was relying on the skill and judgment of the seller in supplying the correct goods. The goods were also not of merchantable quality. The trial judge made the observation that it was virtually impossible to contemplate that potential purchasers would have been using the corks other than for the purpose of sealing bottles of some kind of drink. In the circumstances it is quite unlikely that such a potential buyer would buy these corks, without abatement of the price. The trial judge went on to say “generally speaking, the goods must be purchased from a seller who normally deals in goods of that type” or description.

[4.680] The case Alpine Beef Pty Ltd v Trycill Pty Ltd [2010] FCA 136, although brought under the old Trade Practices Act 1974 (Cth), illustrated how the two implied warranties of merchantable quality and fitness for purpose tend to be grouped together as obligations rather than run separately. The plaintiffs commissioned the construction of a luxury yacht from the defendant company (trading as “Boatspeed’”). This case concerns an oral contract between the owner of the plaintiff company, Howard, for the design and manufacture of a luxury yacht and the defendant, Boatspeed. Boatspeed had made a number of representations about its ability to deliver a luxury product which would be allegedly “perfect” and the plaintiff company claimed reliance upon these representations. Within a short period after delivery of the new yacht to the plaintiffs, blistering of the hull was observed. Boatspeed repaired this defect, initially indicating it would not do further repairs, but despite this claim, continued doing repairs until 2007. After that date, it cost the plaintiffs some $330,000 to have a third party continue repairs on their “perfect” yacht. This action was brought to recover the third party costs on the basis that the implied warranties of fitness for purpose and merchantable quality had not been met. Unfortunately for the plaintiffs, the court found that Mr Howard had made the contract personally with Boatspeed and that his company was not a party to the proceedings. Also the action was out of time being outside a six-year limitation period proscribed in the Act.

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Whilst Mr Howard was unsuccessful due to the technicalities of the law, it is likely that if the action had been correctly brought within the time frame of the then Trade Practices Act, the case may have resulted differently. It does illustrate, however, the practical application of both the implied warranties of fitness for purpose and merchantable quality. Goods that have more than one purpose can still be of merchantable quality if they are fit for one of those purposes. Goods may also be of merchantable quality but still not suitable for a particular purpose.

Implied condition: correspond with sample [4.690] Where there is a sale by sample, the NSW Act implies conditions that: • the bulk corresponds with the sample; • the buyer is to have a reasonable opportunity to compare the bulk with the sample; and • the goods are free from any defect, not apparent from reasonable examination, that would make them unmerchantable. These same conditions are implied by Sale of Goods Act 1895 (SA), s 15(1) and (2) and Sale of Goods Act 1954 (ACT), s 20(1) and (2), and also in the Acts of the other States and Northern Territory. There is a contract for the sale of goods by sample where the contract expressly or impliedly says so, or where the circumstances imply that it is so, eg where a salesperson gives out samples. The most common examples of sales by sample, as distinct from sales by description from sample, are to be found in the sale of bulk goods like wheat and flour.

Can the implied conditions and warranties be excluded by the contract? [4.700] The implied conditions and warranties may be and have frequently been varied/limited /excluded by express or implied agreement between the parties involved in the sale. Under s 57 of the Sale of Goods Act 1923 (NSW) (Goods Act 1958 (Vic) s 61: Sale of Goods Act 1895 (WA) s 54; Sale of Goods Act 1895 (SA) s 54; Sale of Goods Act 1896 (Tas) s 59; Sale of Goods Act 1896 (Qld) s 56 and Sale of Goods Act (NT) s 57) it is provided that any rights or duties implied by law in a contract may be varied or negatived by express agreement or by usage or in the course of dealings between the parties. Standard form contracts or express provisions meant that the implied conditions and warranties could be excluded or limited and the buyer lost the protection of the implied conditions and warranties under the Act. However in NSW the Act provides protection where a contract for sale is defined as a “consumer sale”. Under s 62 of the Act a consumer sale means a sale of goods (other than by auction) by a seller in the course of a business where the goods a)

are of a kind commonly bought for private use or consumption and [4.700] 209

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b)

are sold to a person who does not buy or hold themselves out as buying the goods in the course of a business.

The significant words are commonly bought. The buyer’s purpose in buying the goods, or the use to which they will be put, is irrelevant. The test is whether the goods are commonly bought for private use or consumption. If the answer to this question is, “Yes”, and the goods are not bought in the course of a business, there is a consumer sale. Consider the following examples: 1.

Angus purchased a plasma TV from a retailer for $3,500 and installed it in the foyer of his accounting office to entertain clients waiting for appointments. Even though the TV is used in his business such goods are “commonly purchased” for private use and consumption. This would be a consumer sale.

2.

Angus buys a new Ford sedan to enable him to drive to his accounting business and attend meetings with clients, etc. This would also be a consumer sale as new cars are “commonly purchased” for private use and consumption.

Section 64 of the Act states that any term in a consumer contract that tries to exclude or restrict the implied conditions and warranties in ss 18, 19 and 20 is void. In addition any express warranty or condition in a consumer sale does not negative a condition as to merchantable quality implied by this Act. The High Court observed in Austral Pacific Group Ltd (in liq) v Airservices Australia (2000) 203 CLR 136; [2000] HCA 39 at [3] that the implied conditions and warranties in consumer legislation were “statutorily created and take effect by legal fiction, namely that the parties make a contract including the relevant obligations”.

AUCTION SALES [4.710] The Act makes these specific provisions for auction sales: • where the sale is by lots, each lot is a separate contract; • the sale is complete when so announced, usually on the fall of the hammer; • neither the seller nor the seller’s agent can make a bid unless notice is given and the bid is expressly reserved; • the buyer can treat an unreserved bid by the seller as fraudulent; and • any reserve price must be notified and must be reached to constitute a sale.

DOES THE COMMON LAW IMPLY CONDITIONS AND WARRANTIES? [4.720] Outside of the implied conditions and warranties under the Sale of Goods Acts generally, the common law does not offer similar conditions or 210 [4.710]

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warranties about quality or fitness for purpose. The principle caveat emptor (“let the buyer beware”) applies to most sales and the buyers must rely mostly on the common law principles of contract law to protect themselves. However the legal position of consumers was primarily protected by other State and Commonwealth legislation such as the Consumer, Trader and Tenancy Tribunal Act 2001 (NSW) and the Competition and Consumer Act 2010 (Cth). These laws have now been substantially modified by the introduction of the new Australian Consumer Law and these are all discussed in more detail in Topic 5.

Revision questions 1.

2.

George buys goods from Harvey for $2,000 and it is agreed that Harvey shall deliver the goods as part of the terms of their agreement. However the agreement does not specify the time when Harvey must send the goods to George. Under the Sale of Goods Act in NSW when must the seller send the goods after the sale? Would your answer be different if the contract was made in Western Australia? Chrissie joins the gym to get fit. It’s a long time since she has purchased active wear and sports shoes and she is amazed at the range. She asks the salesperson at the local retail sports store for a good pair of “sneakers” that are suitable for aerobics in a gym. She is directed to a table with “specials” on sale. The salesperson picks out a pair and informs Chrissie that they were suitable for aerobics. They have no obvious faults and are in new condition. She tries them on and they fit perfectly. She buys them for the “special” price of $175 instead of the usual price of $250. She wears them on her first trip to the gym and during an aerobics class the rubber sole of the right sneaker pulls away from the upper part of the shoe. She falls over and is badly injured. The shop denies any liability for her injuries. The manager claims that the sneakers were sold at half the price and so she cannot expect them to be perfect. What can Chrissie do?

3.

Telco is a software manufacturer who only supplies their products online. Jolly electrics purchases software from Telco to maintain stock levels and generate invoices for customers. Unfortunately, Jolly discovers that the software is not compatible with their operating system and Telco refuses to modify it. Jolly refuses to pay for the software. Telco insists they will pursue the matter in court. Will Telco win? Give reasons for your answer.

4.

What does the term “caveat emptor” mean?

5.

Do both of the Sale of Goods Acts in NSW and Queensland allow the parties involved in a contract for sale of goods the opportunity to exclude the implied conditions and warranties under the Acts?

6.

What are the consequences of not registering an interest under the Personal Property Securities Register? [4.720] 211

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7.

Why is a retention of title clause considered to be a registerable security interest under the PPS Act?

212 [4.720]

TOPIC 5 Competition and Consumer Law Introduction to the Competition and Consumer Act 2010 (CCA) ............... Administration of the CCA ................................................................. Part IV – restrictive trade practices provisions in the CCA .......................... Concept of market ........................................................................... Concept of competition .................................................................... Division 1 – cartel conduct ................................................................. Division 2 – other provisions............................................................... Boycotts ......................................................................................... Misuse of market power .................................................................... Exclusive dealing.............................................................................. Resale price maintenance................................................................... Acquisitions .................................................................................... Exceptions ...................................................................................... Authorisations ................................................................................. Notification..................................................................................... Introduction of the Australian Consumer Law......................................... The Constitution and the ACL ............................................................. Enforcement of the ACL..................................................................... Regulations under the ACL ................................................................. How has the ACL changed the law? ..................................................... How is the ACL structured? ................................................................ What do the ACL chapters contain? ..................................................... Unfair terms in consumer contracts – an overview...................................

[5.10] [5.20] [5.80] [5.90] [5.100] [5.110] [5.180] [5.220] [5.280] [5.340] [5.400] [5.440] [5.450] [5.460] [5.470] [5.490] [5.510] [5.520] [5.530] [5.540] [5.550] [5.560] [5.870]

Extract from Miles C and Dowler W, A Guide to Business Law (21st ed, Lawbook Co., 2015), Chapter 19 (including updates for 2016).

Terminology • ACCC: Australian Competition and Consumer Commission; • ACL: Australian Consumer Law; • ASIC: Australian Securities and Investments Commission; • Authorisation: approval of conduct by the ACCC upon application, where ACCC is satisfied that public benefit outweighs any competitive effect; • Boycott: conduct which involves conduct by one or more suppliers to hinder or prevent another supplier in the same market conducting his business; • Cartel A cartel is formed when two or more competing businesses agree to work together to profit: fixing prices so there is no competition and buyers have no choice allocating customers, suppliers or territories to remove competitors rigging bids so that cartel members can rotate winning jobs at inflated rates 213

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controlling the output or limiting the amount of goods and services available to buyers so they have no choice but to pay higher prices. • Competition: independent rivalry in a market for goods and/or services; • Claimant: person who brings a claim. Usually this will be a consumer or a regulator such as ACCC; • COAG: Council of Australian Governments; • Injunction: an order by the court for a party to do, or cease to do, or refrain from doing certain acts; • Guarantees: promises that the ACL implies into all contracts to supply goods or services to consumers; • Notification: applies to exclusive dealing only; immunity from prosecution granted by the Act upon notification of potential exclusive dealing conduct (such immunity may later be removed by ACCC); • Resale price maintenance: the specifying of a benchmark price below which goods and services may not be sold; • Respondent: person who refutes the claimant’s action. Mostly, this would be a business; • Transparency: the term (or contract) is expressed in language which makes it simple for most readers to understand its meaning.

INTRODUCTION TO THE COMPETITION AND CONSUMER ACT 2010 (CCA) [5.10] In a speech on 13th March 2014 to the National Consumer Congress in Sydney the Hon Bruce Billson MP (Minister for Small Business) recognised the importance of a strong consumer law in the digital age and how changes would be required to keep pace. He declared that “the object of our Competition and Consumer Act is to enhance the welfare of Australians through the promotion of competition and fair trading and the provision of consumer protection”. See http://bfb.ministers.treasury.gov.au/speech/0052014. The Competition and Consumer Act 2010 (Cth) (CCA) replaced the Trade Practices Act 1974 (Cth) in July 2010. The unfair contracts provisions of the Australian Consumer Law (Sch 2 to the CCA) commenced operation from 1 July 2010. The rest of the statute came into force from 1 January 2011. The CCA is enforced by the Australian Competition and Consumer Commission (ACCC). The ACCC ensures that the CCA promotes competition in the Australian marketplace so that consumers, businesses and the public generally will enjoy the benefits of fair regulation. The ACCC also regulates national infrastructure industries and monitors compliance with Australia’s competition and consumer laws. 214 [5.10]

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The CCA covers unfair market practices, industry codes, mergers and acquisitions of companies, product safety, product labelling, price monitoring, and the regulation of industries such as telecommunications, gas, electricity and airports. The CCA is structured as follows: • Part IIIA – third party access to nationally significant, essential facilities • Part IV – anti-competitive practices • Part IVB – industry codes of conduct • Part VI – enforcement and remedies • Part VII – authorisations, notifications and clearances • Part VIIA – price monitoring and surveillance relating to industries or businesses declared by the Australian Government • Part X – international liner cargo shipping • Part XI – application of ACL as a law of the Commonwealth • Part XIB – anti-competitive conduct in telecommunications • Part XIC – access to services for telecommunications. The Australian Consumer Law Schedule 2) – misleading or deceptive conduct, unconscionable conduct, unfair practices, conditions and warranties, product safety and information, liability of manufacturers for goods with safety defects offences, and country of origin representations. It is also possible to transfer private actions between the Federal Court, State and Territory Supreme Courts and the Family Court. The CCA allows for certain actions to be transferred to the Federal Court such as a matter arising under the Competition Code (as defined in s 150A of the Competition and Consumer Act 2010). The Jurisdiction of Courts (Cross Vesting) Act 1987 (Cth) (or the relevant other State or Territory Act) gives the party to the action some choice of courts so that he or she may choose a less costly or more convenient forum. Note, however, that s 45D, 45DA, 45DB, 45E or 45EA of the Competition and Consumer Act 2010 may only be heard by the Federal Court. Class actions are also allowed under 1992 amendments to the Federal Court of Australia Act 1976 provided the number of such persons is not less than seven.

ADMINISTRATION OF THE CCA [5.20] The administration of the Act falls essentially to three bodies: • the Australian Competition and Consumer Commission (ACCC) (formerly called the Trade Practices Commission); • the Australian Competition Tribunal (formerly called the Trade Practices Tribunal); and • the National Competition Council. [5.20] 215

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Australian Competition and Consumer Commission [5.30] The Australian Competition and Consumer Commission (ACCC) is a Commonwealth statutory body and has a Chair (from August 2011 and renewed for a further three years from August 2016, Mr Rod Sims), Deputy Chair and other full-time members appointed by the Commonwealth Government, after consultation. It was formed by a merger between the former Trade Practices Commission (TPC) and the Prices Surveillance Authority (PSA). Members of the ACCC are expected to have knowledge and experience in industry, commerce, economics, law, public administration or consumer protection. The ACCC has offices in all capital cities and some larger regional centres. Staff employed in these regional offices are public servants, as are the larger staff assisting the ACCC at Head Office in Canberra. The main functions of the ACCC include: • administration and enforcement of the Act; • authorisation of certain types of restrictive trade practices that otherwise would be prohibited; • notification for certain conduct; • dissemination of information to the public; and • prosecution of breaches of the Act. With the merger between the TPC and the PSA, the ACCC acquired a number or pricing functions under the former Pt VIIIA of the Trade Practices Act 1974, including: • the ability to vet proposed price rises of any business which the ACCC places under price surveillance; • the ability to hold enquiries into pricing policies; and • to monitor prices, costs and profits of industries/businesses and report to the Minister. The Australian Energy Regulator is a constituent but separate part of the ACCC and is responsible for economic energy regulation. It shares staff and premises with the ACCC, but has a separate board, although at least one board member must also be a Commissioner of the ACCC. These bodies provide a joint Annual Report each year.

Australian Competition Tribunal (ACompT) [5.35] This tribunal is a quasi-judicial appeal tribunal established to review the decisions of the ACCC in relation to: • authorisations; • notices regarding exclusive dealing; and • ministerial decisions or decisions of the ACCC in regard to third party access to significant infrastructure facilities. 216 [5.30]

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The Tribunal is headed by a president and also has several deputy presidents. It can also authorise mergers and make declarations relating to offshore mergers. It is located in the Federal Court of Australia. The hearings of the Tribunal are generally open to the public. Further information can be accessed at: http:// www.competitiontribunal.gov.au.

National Competition Council [5.40] The National Competition Council is made up of a president and up to four councillors. The Council’s main function is to promote the economically effective use of, investment in and operation of infrastructure by which services are supplied in order to promote effective competition. See details at http://ncc.gov.au.

Federal Court of Australia [5.50] The Federal Court of Australia is a federal court with jurisdiction to interpret the Act and to punish breaches of the provisions of the Act.

Commonwealth Director of Public Prosecutions [5.70] The Commonwealth Director of Public Prosecutions (CDPP) can prosecute certain matters which it considers may be a “cartel offence”. The CDPP liaises with the ACCC in relation to these matters which the ACCC believes should be prosecuted as a criminal offence. A Memorandum of Understanding exists between the ACCC and the CDPP in relation to such prosecution. The Prosecution Policy of the Commonwealth will also assist in determining whether a matter should be further pursued. If a person meets the definition of “whistleblower” under the appropriate legislation the CDPP may make a determination to grant that person immunity from prosecution. For a further discussion of whistleblowers’ legislation see Chapter 6 (Miles). Pecuniary penalties provisions in the Competition and Consumer Act 2010 can be found in s 76 and include civil penalties of up to $10 million for corporations and $500,000 for persons for breaches of many Part IV provisions of the Act. Part VI of the Act – Enforcement and remedies – contains other penalties and remedies, many of which are provided in more detail later in this topic.

[5.70] 217

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PART IV – RESTRICTIVE TRADE PRACTICES PROVISIONS IN THE CCA Scope [5.80] Section 51 of the Constitution does not give the Commonwealth Parliament power to make laws about restrictive or anti-competitive trade practices. Accordingly, the Commonwealth based the Act on its powers over trading and financial corporations and on other powers.

CONCEPT OF MARKET [5.90] The Competition and Consumer Act 2010 aims to encourage competition in a market. We should therefore look at the concepts of market and competition. Section 4E of the CCA contains a concept of market without actually defining it: A market in Australia and, when used in relation to any goods or services, includes a market for those goods or services that are substitutable for, or otherwise competitive with, the first mentioned goods or services.

In Re Queensland Co-operative Milling Association Ltd; Re Defiance Holdings Ltd (Barnes Milling Application) (1976) 25 FLR 169 at 190, the Trade Practices Tribunal gave its views about the market: A market is the area of close competition between firms or, putting it a little differently, the field of rivalry between them (if there is no close competition, there is of course a monopolistic market). Within the bounds of a market there is substitution – substitution between one product and another, and between one source of supply and another, in response to changing prices. So a market is the field of actual and potential transactions between buyers and sellers among whom there can be strong substitution, at least in the long run, if given a sufficient price incentive.

The High Court approved these comments in Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (1989) 167 CLR 177, which will be discussed later in this topic in the context of monopolisation, or misuse of market power.

CONCEPT OF COMPETITION [5.100] The Competition and Consumer Act 2010 does not totally define competition. The Tribunal looked at the meaning of the term competition in the Barnes Milling Application. It determined that effective competition requires both flexibility of prices and an “independent rivalry” in all aspects of the price/product/service package offered to customers. Competition is a “process rather than a situation”. The Tribunal made this comment (at 189): Whether firms compete is very much a structure of the markets in which they operate.

The following things are relevant: 218 [5.80]

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• the number and size of independent suppliers, and the degree of market concentration; • any barriers to entry to a market and the difficulties to viable entry into that market for new players; • the extent of product differentiation and sales promotion; • the nature and extent of vertical integration between customers and supplier; and • whether any existing arrangements between firms affect their ability to act independently.

DIVISION 1 – CARTEL CONDUCT [5.110] As we have seen in our definition at the commencement of this topic, cartel conduct consists of two or more competing businesses agreeing to co-operate collectively in various forms of commercial conduct including:

Price fixing [5.115] Arrangements/agreements are made to fix or control prices so there is no competition and buyers have no choice (similar to the previous s 45A of the Trade Practices Act 1974); or In Australian Competition and Consumer Commission v Tyco Australia Pty Ltd [1999] FCA 1799, the ACCC succeeded in gaining penalties (exceeding $15 million) against 38 persons and 18 companies who participated in a “coffee club” cartel which had the purpose of deciding who would win various tenders on offer and at what particular price those tenders would be submitted. The case was handed down in Brisbane in the Federal Court in February 2001. The requirement to fix prices requires an “understanding” between parties as to charging and future increases, as demonstrated by the following case study. In Australian Competition and Consumer Commission v Visy Holdings Pty Ltd (No 3) [2007] FCA 1617 the ACCC alleged Visy engaged in price fixing and market sharing in the market for the supply of corrugated fibreboard packaging (CFP) with Amcor between January 2000 and October 2004.Visy admitted liability. Amcor was not pursued by the ACCC because they applied (successfully) for leniency under the ACCC’s existing Leniency Policy for Cartel Conduct. This conduct occurred prior to the introduction of new “cartel” laws in 2009; and so this case involved s 45 (with the help of the deeming provision for price fixing that then existed in s 45A of the TPA). Visy and Amcor held about 90% of the market for cardboard boxes. Their conduct included understandings between Amcor and Visy to: • maintain their respective market shares and not to deal with each other’s customers’ and, if a customer changed suppliers, the firm receiving that new [5.115] 219

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customer would provide one of its own to the other by way of “compensation” (ie swapping customers); • match annual price increases; and • charge the same prices in respect of particular customers. Visy admitted to 69 contraventions of the TPA and was fined $36 million. The Court stated it was appropriate and reflected the fact that “this must be, by far, the most serious cartel case to come before the Court in the 30 plus years in which price fixing has been prohibited by statute” [320]. Individual penalties of $1.5 million and $500,000 were also awarded against two of the company officers and the Court made orders for declarations as to contraventions, injunctions and an order for a trade practices compliance program. Visy had to pay the costs of the ACCC.

Market sharing [5.120] Agreements or understandings whereby customers, suppliers or territories were allocated to remove competitors: (Australian Competition and Consumer Commission v Visy Holdings Pty Ltd (No 3) [2007] FCA 1617).

Bid rigging [5.125] Cartel members can rotate winning jobs at inflated prices by bids being rigged. In Norcast S.ar.L v Bradken Ltd (No 2) (2013) 219 FCR 14; [2013] FCA 235, Norcast (N) marketed the sale of part of its business called Norwest Wear Solutions (NWS). B and C agreed that before the sale only B would make a bid. B purchased it from N for $190 million. A few hours later B on-sold the business to C for $212 million. This was held to be a bid rigging arrangement between B and C and breach of ss 44ZZR and 44ZZRK of the CCA. If there had not been this bid rigging, C would have bid in excess of $190 million. The court ordered C to pay damages to N of $22 million (the difference between the two selling prices).

Restrictions on supply or outputs [5.126] Directly or indirectly control, restrict or limit outputs in production and supply of goods and services available to buyers so they have no choice but to pay higher prices: see s 44ZZRD of the CCA. The prohibition was introduced into the Trade Practices Act 1974 (now CCA) in July 2009 as a new Division 1 of Part IV. As we have also seen, cartel conduct can be prosecuted by the CDPP as a criminal offence upon recommendation by the ACCC. Penalties include • $340,000 per offence or three times the value of the benefit received or 10% of the annual turnover of the business; or • up to 10 years imprisonment. 220 [5.120]

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The civil penalties for making or giving effect to a cartel provision are the same as those currently available for other contraventions of Part IV. Cartels can vary in size, and can be local, at national level or world-wide. They can increase living costs for the average person and ACCC states that they could potentially affect the prices of relevant commodities “by at least 10 per cent” (source: http://www.accc.gov.au/business/anti-competitivebehaviour/cartels). The CCA prohibits cartel conduct both under civil law and also under criminal law. It is an offence for businesses and individuals to take part in one. To reflect the serious effect of cartel conduct on Australian markets, on 15 August 2014, the ACCC and the Commonwealth Director of Public Prosecutions (CDPP) signed a Memorandum of Understanding (MOU): https:// www.cdpp.gov.au/sites/g/files/net391/f/MR-20140910-MOU-Serious-CartelConduct.pdf. Criteria applied from the MOU includes: • ... the conduct was covert • the conduct caused, or could have caused, large scale or serious economic harm

• the conduct was longstanding or had, or could have had, a significant impact on the market in which the conduct occurred

• the conduct caused, or could have caused, significant detriment to the public, or a class of the public, or caused, or could have caused, significant loss or damage to one or more customers of the alleged participants

• one or more of the alleged participants has previously been found by a court to have participated in, or has admitted to participating in, cartel conduct either criminal or civil

• senior representatives within the relevant corporation(s) were involved in authorising or participating in the conduct

• the Government and thus, taxpayers, were victims of the conduct – even where the value of affected commerce is relatively low

• the conduct involved the obstruction of justice or other collateral crimes committed in connection with the cartel activity.

(Source: http://www.accc.gov.au/business/anti-competitive-behaviour/ cartels#accc-referral-of-matters-for-possible-criminal-prosecution.) Case study [5.130] In ACCC v Colgate-Palmolive Pty Ltd (No 2) [2016] FCA 528 the court ordered penalties of $18 million in relation to the supply of laundry detergents. Woolworths admitted to being knowingly concerned in the making of, and giving effect to, an understanding between Colgate, PZ Cussons Australia Pty Ltd (Cussons) and Unilever Australia Limited (Unilever) that they would cease to supply standard laundry detergent and instead provide only ultra-concentrate.

[5.130] 221

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Mr Paul Ansell, a Colgate sales director, was also held party to the conduct, was disqualified from managing a corporation for seven years and ordered to pay $75,000 towards the ACCC’s costs. ACCC Chair Rod Sims said By ordering these substantial penalties, the Court has recognised the seriousness of this conduct, which affected the supply and pricing of laundry detergents, a consumer staple. ... The information sharing understanding involved phone calls between senior managers of competing companies, many of which started as social calls, but turned to unlawful exchanges of pricing information. Any contact between competitors carries risk and while discussion of price is particularly serious, there are many topics which may lead to an anticompetitive understanding. ... This is the equal third largest penalty that the court has ordered for breaches of the competition provisions of the Act and is an indicator of how seriously the court views the conduct ... These penalties were based on Colgate’s turnover, under the current penalty regime for anticompetitive conduct. The ACCC regards this regime as a key tool in obtaining appropriate penalties for breaches of the Act. (Source: http://www.accc.gov.au/media-release/colgateordered-to-pay-18million-penalty-in-laundry-detergent-cartel-proceedings.)

Price fixing (ss 44ZZRF, 44ZZRG, 44ZZRJ and 44ZZRK) [5.140] There are requirements under the sections for price fixing to be contrary to law. These requirements are that there must be a “contract, arrangement or understanding” (the agreement), two or more of the parties to that agreement must be competitors in a market and the agreement must have the purpose or effect (or likely effect) of fixing, controlling or maintaining the price of goods or services. In relation to what would need to be “fixed” – the price of goods/services or a discount, rebate or allowance related to those goods or services. In summary a business will be seen to have engaged in price fixing if all of the following requirements are satisfied: 1.

The business has a contract, arrangement or understanding with another business.

2.

The businesses must be competitors in the same market.

3.

The contract arrangement or understanding contained a provision that had the purpose or likely effect of fixing controlling or maintaining prices.

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Although competitors may often appear to be acting collusively, sometimes price fluctuations are simply a case of competitors responding to higher prices of others in the market. Case study [5.150] In Trade Practices Commission v Email Ltd (1980) 43 FLR 383, two companies, Email and Warburton-Franki, manufactured meters that measured kilowatt hours (hence the reason this case is often referred to as the Kilowatt hours case). Email was the market leader in Australia. These companies issued matching price lists, submitted identical tenders and adopted the same price variations. The Commission alleged that the companies were in breach of s 45 of the TPA. The court accepted evidence that the parallel pricing was the product of market forces, competition and commercial necessity. It was not unreasonable for a smaller corporation to follow the movements of the market leader, thus responding to those market forces and to competition. It dismissed the prosecution. Independently-held beliefs or hopes are not an understanding. Sometimes businesses may not be recognised as competitors in the same market.

Case study [5.155] In ACCC v ANZ Banking Group Ltd [2013] FCA 1206 (18 November 2013) the ACCC alleged that in 2004 the ANZ Bank sought to limit the amount of a refund a mortgage broker, Mortgage Refunds Pty Ltd, could provide to its customers in respect of arranging ANZ home loans, in contravention of s 45 of the TPA (now the CCA). However, the Federal Court found that ANZ did not participate in a market for the provision of loan arrangement services and consequently that ANZ and Mortgage Refunds were not “competitors” in this market. As a result, ANZ’s conduct did not amount to a price fixing agreement and Justice Dowsett dismissed the ACCC’s application. The ACCC lodged an appeal on 10 December 2013. On appeal, the Federal Court dismissed this claim on 31 July 2015, finding that ANZ and Mortgage Refunds were not competitors and, as a result, the conduct did not constitute price fixing (confirming the primary judge’s finding).

Case studies [5.160] In contrast, Trade Practices Commission v David Jones (Australia) Ltd (1986) 13 FCR 446, the evidence showed that there had been a meeting between a manufacturer of manchester products and several retailers at which it was agreed to raise the prices of those products in accordance with a list distributed at the meeting. Other evidence showed that goods were then sold in accordance with those prices. The court held that there was sufficient circumstantial evidence to justify a finding that there was an agreement in breach of s 45 of the TPA. [5.160] 223

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In ACCC v Flight Centre Limited (No 2) [2013] FCA 1313, the ACCC brought an action alleging that Flight Centre attempted to induce Singapore Airlines, Emirates and Malaysian Airlines to breach ss 45 and 45A of the Act. The court will consider: whether airlines and travel agents competed in a market for booking and distribution services, or whether the only relevant market was the market for international passenger air travel services – whether travel agents competed with airlines in that market given they were the agent of the airlines when supplying such services – application of ss 45 and 45A of the Trade Practices Act 1974 (Cth) … Flight Centre’s position was “that there can be no lessening or likely lessening of competition in circumstances where the provider of the air travel remains the same whether that travel is sold to a retail consumer directly by the airline or for that same airline via a travel agent such as Flight Centre” and that, “in attempting to have the airlines concerned allow it to access international air travel fares at the same price as the airlines concerned sold such travel by direct retail sale, it was attempting to induce them not to lessen but to increase competition” (see [7], trial judgment). In its recent media release the ACCC stated: Flight Centre has traditionally offered a “Price Beat Guarantee”, where Flight Centre would beat a cheaper airfare offered by its competitors by $1 plus a $20 voucher. As a result of the Price Beat Guarantee, Flight Centre was obliged to match the cheaper web fares offered by the airlines, which reduced the margin obtained by Flight Centre. At first instance, Justice Logan found that Flight Centre had contravened the Act and ordered that Flight Centre pay penalties totalling $11 million. Flight Centre appealed to the Full Court of the Federal Court from Justice Logan’s liability and penalty decisions, and the ACCC lodged a cross-appeal in relation to the penalties imposed. The Full Court allowed Flight Centre’s appeal and dismissed the ACCC’s cross-appeal in July 2015. (on 11 March 2016) ... The High Court of Australia has granted the Australian Competition and Consumer Commission special leave to appeal the decision of the Full Court of the Federal Court in relation to allegations that Flight Centre Travel Group Limited (Flight Centre) attempted to induce three international airlines to enter into price fixing arrangements in breach of the Trade Practices Act 1974 (Cth) (now called the Competition and Consumer Act 2010) (the Act). In July 2015, the Full Court allowed an appeal by Flight Centre against the judgment of the trial judge, Justice Logan. Justice Logan had found that Flight Centre and the airlines competed in the market for booking and distribution services for the retail or distribution margin on the sale of air fares, and that Flight Centre had attempted to induce anti-competitive arrangements or understandings with the airlines to prevent them from offering online fares for international airfares on their websites which undercut the fares for those flights which were being offered by Flight Centre. (Source: https://www.accc.gov.au/ media-release/accc-granted-special-leave-to224 [5.160]

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appeal-to-the-high-court-from-the-full-federal-court-flight-centre-judgment.)

Price signalling [5.170] Another prohibition relates to “price signalling”. Price signalling provisions are contained within ss 44ZZW and 44ZZX of the CCA. These came into effect on 6 June 2012 and initially apply only to the banking sector, and only in relation to the taking of money on deposit and making advances of money or loans. In particular, disclosure is an important issue in relation to products and services offered. An example of disclosure would be a credit provider disclosing how long a credit card may take to pay off if payments were maintained at the minimum level and at the present interest rate on the card. In relation to the new laws the ACCC says that it would be necessary for firms or businesses to ensure that statements are not misleading or deceptive. The Court, in evaluating whether a firm has made a disclosure for the purpose of substantially lessening competition under the general prohibition, will look for certain factors. These include: • was the disclosure made privately to other competitors? • how specific was the disclosure? • does the information relate to present activities or future or past ones? • can the public easily locate the information? • is the disclosure part of the usual type of disclosure made by that business?

DIVISION 2 – OTHER PROVISIONS Section 45: contracts, arrangements or understandings that restrict dealings or affect competition [5.180] Section 45 of the CCA is a general provision that may be viewed as a broad “catch-all” section of the Act. It forbids the making or carrying out of a contract, arrangement or understanding that has the purpose or likely effect of substantially lessening competition in a market in which a corporation supplies or acquires goods or services. Obviously this includes a broad spectrum of many types of conduct not caught by the more specific provisions covered later in Pt IV. Section 49 of the CCA includes a prohibition of dual listed company arrangements that affect competition. Dual listed company arrangements are defined, interestingly in the Income Tax Assessment Act 1997, s 125.60(4) as “:… an * arrangement under which 2 publicly listed companies, while maintaining [5.180] 225

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their separate legal entity status, shareholdings and listings, align their strategic directions and the economic interests of their respective shareholders …”). In News Ltd v South Sydney District Rugby League Football Club Ltd [2003] ATPR 41-943, “Souths” (as the Club was known) challenged the NRL’s decision to exclude them from the 14 club first grade league competition of the newly formed National Rugby League (NRL) in 2000. They were initially unsuccessful, but won an appeal and were able to rejoin the NRL in 2002. However, the NRL then took the matter to the High Court. The High Court did not perceive that the exclusion of Souths was an exclusionary provision targeting Souths from participating in the League competition and thus an anti-competitive measure. Rather, it was a commercial decision seen to preserve the viability of the League: it was not, therefore, an illegal exclusionary provision under the Act. Contracts, or clauses within contracts, that breach s 45 of the CCA are not enforceable. If it is possible to sever an offending clause, the rest of the contract is enforceable. The section does not only attack formal contracts. It also covers informal “understandings”. In addition the Trade Practices Amendment Act 2006 (Cth) permitted certain collective bargaining arrangements. A joint venture exemption was also available where the joint venture itself did not have an anti-competitive purpose or effect.

Section 45(2): primary boycotts [5.190] Broadly, s 45(2) of the CCA prohibits the making (s 45(2)(a)(ii)), and giving effect to (s 45(2)(b)(ii)), a contract, arrangement or understanding which has the effect of substantially lessening competition in a market for goods and services. Section 45(2) also prohibits primary boycotts, meaning action by competitors to protect themselves against competition from others. Specifically the section targets contracts, arrangements or understandings between competitors that have the purpose of preventing or restricting the supply of goods or services to, or the acquisition of goods or services by particular persons or classes of persons. In essence, primary boycotts involve three parties: two parties entering into a contract arrangement or understanding that affects a third party. In McCarthy v Australian Rough Riders Association Inc [1988] ATPR 49,017 (40-836), the rules of the association provided that members could not compete at rodeos that were not affiliated with the association. McCarthy was a member of the association and competed on a non-affiliated rodeo circuit. The association fined him $3,000 for breaking the rules. McCarthy took action in the 226 [5.190]

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Federal Court. The court held that the association was a party to an exclusionary arrangement under s 45(2) and that the rule in question was unenforceable.

Section 45B: covenants affecting competition [5.200] Section 45B prohibits covenants that are likely to have the effect of reducing competition in the market. In this context, covenant probably means any promise. This section does not affect covenants on residential land. It would, however, affect a restrictive covenant on a commercial lease.

Section 45C: covenants in relation to prices [5.210] Section 45C prohibits covenants that have a price-fixing effect.

BOYCOTTS Section 45D: secondary boycotts [5.220] Section 45D targets situations where parties act together to block the supply of goods or services. Section 45D(1) prohibits a person, in concert with a second person, from engaging in conduct that prevents or hinders a third person (not the employer of the first or second person) from acquiring goods or services from, or supplying goods or services to a fourth person (being a corporation) when the conduct has the purpose or likely effect of causing loss or damage to the business of the fourth person. Secondary boycotts are only prohibited if they substantially lessen competition in a market for goods or services, cause substantial loss or damage or have some impact on trade or commerce. Four distinct parties participate in a secondary boycott. Quite often, one of the parties engaged in the prohibited conduct is an industrial union and the methods used on the fourth party are recognisable industrial tactics. For example, in Australian Meat Industry Employees Union v Mudginberri Station Pty Ltd (1986) 161 CLR 98, Mudginberri was a meat exporter. The company was in dispute with the Australian Meat Industry Employees Union over working conditions (employment of non-union labour). The union set up a picket line outside the company’s meat works. Meat inspectors who certified the meat as being suitable for export were members of another union and refused to cross the picket line to inspect the meat. The company lost valuable export contracts. Mudginberri alleged that there was a breach of the TPA and obtained an injunction. The union refused to obey the injunction and received substantial fines. Jurisdiction to hear disputes relating to the boycott provisions rests with the Federal Court of Australia. However, the 1994 amendments to the TPA and the inclusion of these secondary provisions into the text of the Competition Code [5.220] 227

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together with strong governmental endorsement of competition principles has given the ACCC more confidence to deal with these issues than the prior Trade Practices Commission. The section also applies where the third person is a corporation and the fourth person is not a corporation and the conduct is likely to cause substantial loss or damage to the business of the third person.

Section 45DA: secondary boycotts for the purpose of causing substantial lessening of competition [5.230] Section 45DA is in similar terms and prohibits the boycotting conduct where it has the purpose or likely effect of substantially lessening the competition in a market where the fourth person is involved.

Section 45DB: boycotts affecting trade or commerce [5.240] Section 45DB prohibits persons from acting in concert to prevent or hinder a third person from engaging in international trade.

Section 45DC: involvement and liability of employee organisations [5.250] Section 45DC makes organisations of employees liable to certain penalties for breaches of the above sections on boycotting.

Section 45DD: situations in which boycotts permitted [5.260] Section 45DD preserves the rights of unions and employees to take lawful industrial action, particularly where the boycott affects workers’ pay or employment conditions.

Section 45E: prohibition of contracts, arrangements or understandings affecting the supply or acquisition of goods or services [5.270] Section 45E extends to prohibit the making of an agreement with a union for the purpose of preventing or hindering trade between one person and another person (the target). It is designed to cover circumstances where a person feels threatened by industrial action and agrees to the demands because of it. Note that s 45EA proscribes the giving of effect to such an agreement.

MISUSE OF MARKET POWER Section 46: misuse of market power [5.280] Section 46 applies to a corporation with a substantial degree of power in a market for goods or services. It prohibits that corporation from using that market power to: 228 [5.230]

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• eliminate or substantially damage a competitor in that market or in any other market; • prevent the entry of a person into any market; and • deter or prevent a person from engaging in competitive conduct in any market. A further subsection, s 46(1AA) was introduced to specifically target predatory pricing. Predatory pricing occurs when a company deliberately sets its prices at a low level sufficient to damaging or forcing a competitor to withdraw from the market. The company will therefore have less competition and market forces will have been reduced so that would be less pressure on the company to be competitively priced. Consumers of course will be forced to pay higher prices. Another subsection, s 46(1AAA) applies to business conduct occurring on or after 25 September 2007. This prohibits businesses with a substantial market share from selling goods or services for a sustained period at a price below their relevant cost of supply. As with s 46(1), a business must act with an anti-competitive purpose. Case study [5.290] In Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (1989) 167 CLR 177, it was acknowledged that BHP had a near monopoly of steel manufacture in Australia. It was also the major supplier of steel and steel products, with about 85% of the market. It made and supplied a product known as a Y-bar (used in star picket posts for fencing) to AWI, its wholly-owned subsidiary. Queensland Wire (QWI), a competitor to AWI, sought supplies of the Y-bar from BHP. BHP at first refused to supply them. It later supplied them but at a high price compared with other steel products. QWI alleged a breach of s 46 of the TPA. The High Court held that BHP had a substantial degree of market power in the market for steel products. By acting as it did, BHP was using that power to prevent QWI from effectively competing in the market. Mason CJ and Wilson J defined market power in these terms (at 188): Market power can be defined as the ability of a firm to raise prices above the supply cost without rivals taking away customers in due time; supply cost being the minimum cost an efficient firm would incur in producing the product. Dawson J quoted with approval this definition of market power (at 200): A firm possesses market power when it can behave persistently in a manner different from the behaviour that a competitive market would enforce on a firm facing otherwise similar cost and demand conditions (Kaysen and Turner, Antitrust Policy).

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Case study [5.300] In Eastern Express Pty Ltd v General Newspapers Ltd (1992) 35 FCR 43, the respondents were the publishers of the Wentworth Courier. The Courier was distributed weekly in Sydney’s eastern suburbs and carried a large amount of real estate advertising. Several estate agents formed a company, Eastern Express Pty Ltd, to publish a competitive newspaper, the Eastern Express. Local agents advertised in the new paper as well as the Courier. The management of the Courier heavily discounted its rates. It also took promotional and marketing steps to keep advertisers’ loyalty. The appellant sued in the Federal Court for a breach of s 46 of the TPA. The court held that there was no breach. The respondents did not have the substantial degree of power in the market to trigger the section. The relevant market was the real estate advertising market in the eastern suburbs of Sydney. There were sufficient other outlets (the appellant’s newspaper and the regular Sydney Morning Herald supplements) in the area. The court further held that a substantial degree of market power means a large degree of power and is a relative concept. The primary test is whether it is “rational or possible for new entrants to enter the relevant market”.

[5.310] Note: this section is directed not only at corporations that are able to substantially control a market, but also corporations with considerable influence in a market. Direct evidence of the intention of a corporation to damage another is not required. The court may infer this from the evidence of the conduct of the corporation. An interesting case, Giraffe World Australia Pty Ltd v ACCC [1999] ATPR 42,527 (41-669) also examined the possibility of the ACCC’s own accountability under s 46 of the TPA. Did the use by ACCC of its regulatory and enforcement power under this section constitute the use of “power in a market”? The ACCC published a media release in which it was critical of Giraffe’s conduct. Did this constitute misuse of “power in a market”? The court held that use of the statutory power of regulation was not a misuse of power sufficient to contravene the section. Note: corporations who hold substantial market power or share, in engaging in certain conduct, may not necessarily be misusing that market share, but rather engaging in conduct which breaches other sections of the Act. Case studies [5.320] In Universal Music Australia Pty Ltd v ACCC (2003) 57 IPR 353; [2003] ATPR 41-947, a wholesaler of sound recordings objected to retailers engaging in parallel importation of sound recordings after the Copyright Act 1968 (Cth) was amended to allow parallel importation. The court did not see this as a misuse by Universal of their market power, but rather a breach of s 47, the exclusive dealing provisions of the TPA.

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In ACCC v Pfizer Australia Pty Ltd [2015] FCA 113 the findings of the court illustrated the importance of demonstrating a “substantial” market power in any proscribed purpose under the section – that is, to deter or prevent competitors from engaging in competitive conduct or for the purpose of substantially lessening competition. The allegations made by the ACCC were that Pfizer had misused its substantial market “in relation to particular cholesterol lowering products by its offers to supply its originator brand of atorvastatin, Lipitor, and its own generic atorvastatin product to community pharmacies in early 2012”. Pfizer offered significant discounts and the payment of rebates previously accrued on sales of Pfizer’s Lipitor, conditional on pharmacies acquiring a minimum volume of Pfizer’s generic atorvastatin product and agreeing to restrict their re-supply of competing generic atorvastatin products. The court dismissed the ACCC’s application, finding that while Pfizer had taken advantage of its market power by engaging in the alleged conduct, “Pfizer’s market power was no longer ‘substantial’ at the time the offers were made in January 2012 …”. (Source: http://www.accc.gov.au/media-release/ accc-appeals-pfizer-decision.) Interestingly, the court also rejected the ACCC’s claims that Pfizer’s purpose for engaging in its pre-Patent expiry conduct was to cause a substantial lessening of competition within the meaning of s 47 (see [5.340]). There is suggestion after the Pfizer decision that s 46 may need amending to address the concept of “purpose” and establish instead a “likely effect” test to establish anti-competitive effect in this context.

Section 46A: misuse of market power – corporation with substantial degree of power in trans-Tasman market [5.330] Section 46A is a special provision (originally added to the TPA in 1990) that prohibits certain types of misuse of market power in the trans-Tasman market – a market in Australia and New Zealand – for the supply of goods or services. Complementary legislation was introduced to support this concept in New Zealand: s 36A of the Commerce Act 1986. The net result is that action can be taken for misuse of market power, whether the corporation is Australia or New Zealand based and regardless of where the conduct occurred. The Australian Federal Court may even sit in New Zealand to deal with any action under s 46A.

EXCLUSIVE DEALING Section 47: exclusive dealing [5.340] Section 47 strikes at restrictions placed by suppliers on the trading freedom of customers and by customers on suppliers. It forbids a corporation from placing restrictions on the supply or offer to supply goods or services or [5.340] 231

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the resupply or offer to resupply goods or services where those restrictions limit the freedom of the other party to acquire goods or services from a competitor of the supplier. It also prohibits the acquirer from engaging in similar restrictive conduct. Exclusive dealing may be thought of as an attempt to control the way in which another business or corporation operates in the marketplace. These “controls”, viewed as vertical restraints, may attempt to control: • product (s 47(2)(d)), eg by providing that A will not supply B if B deals with C, or that A will supply B only if B buys other products from A; • distribution of product (s 47(2)(f)(i)), eg A supplies B provided that B promises that it will not resupply; and • exclusive territory (s 47(2)(f)(ii)), eg A will not supply to B unless B undertakes not to sell or resupply in certain geographical areas. Note that this may prove a problem in franchise agreements where selling territory is stipulated. The franchisor needs to be aware that such a provision may offend the Act and thus should seek advice from the ACCC. The ACCC’s involvement with franchises is more fully discussed in Chapter 5 (Miles).

Section 47(3): refusal to deal [5.350] Section 47(3) prohibits conduct whereby a supplier refuses to deal in its products “for the reason that” the purchaser has not accepted conditions on the way in which it operates its business. Such restrictions might include restrictions or prohibitions on continuing to deal with a competitor of the supplier. For example, Rhett Bank refuses to make “special” leasing products available to Scarlett retailers if Scarlett continues to offer lease packages from Ashley Bank. Here Rhett Bank is insisting on exclusivity. Such conduct is clearly anti-competitive.

Third line forcing [5.360] The Act also prohibits third line forcing, supplying goods or services on the condition that the purchaser will acquire other goods or services from another supplier. The conduct is only illegal if it has the purpose or effect of substantially reducing competition in any market in which the corporation or a related corporation supplies or acquires goods or services. Case study [5.370] In Trade Practices Commission v Legion Cabs (Trading) Co-operative Society Ltd (1978) 35 FLR 372, the cooperative provided a radio service for its members’ taxis. The rules of the cooperative required members to buy a quota of petrol from a nominated petrol supplier. The cooperative received a commission from the petrol supplier on these sales. If the members did not buy their quota of petrol, the cooperative would impose penalties. Such penalties could include expulsion from the radio network and fines.

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The court held that the cooperative was in breach of s 47 of the TPA and imposed a fine.

Case study [5.380] In Castlemaine Tooheys Ltd v Williams & Hodgson Transport Pty Ltd (1986) 162 CLR 395, a brewery allowed its customers to take delivery of supplies at regional outlets or direct to the liquor outlet. The brewery insisted that direct deliveries were made by its own preferred carriers. A non-preferred carrier sued the brewery, claiming a breach of s 47 of the TPA. The High Court held that this was not exclusive dealing. The brewery could make whatever arrangements it wished for the delivery of its own products.

Case study [5.390] An interesting application of third line forcing formed the subject of a media release by the ACCC in June 1999 (release 54 of 1999). A solicitor attempted to secure conveyancing work for his firm by entering into an agreement with a property agent in relation to its auction program. Clients who signed to have their property auctioned by the property agent also were required to agree to use the solicitors' services. The court found that this conduct by the solicitor constituted “aiding and abetting” (under s 75B of the TPA) the property agent to engage in third line forcing. The dispute was settled on the proviso that the solicitor pay the ACCC’s legal costs, with the solicitor also undertaking to attend certain trade practices training programs. In ACCC v Link Solutions Pty Ltd (No 3) [2012] FCA 348 (5 April 2012) there was an alleged breach of s 47 of the TPA (now the CCA) involving exclusive dealing and third line forcing. A telecommunications company offered call credits to customers on condition they leased equipment from one of a selected group of financial companies. The court held that there was a contravention of TPA, s 47 (now the ACL) as the parties were knowingly concerned with offering customers credits on the costs of telecommunication services on condition they leased equipment from a nominated third party

RESALE PRICE MAINTENANCE Sections 48, 96–100: resale price maintenance [5.400] Section 48 makes it unlawful for a supplier to specify a minimum retail price, or “benchmark price”, below which goods and services may not be sold. This practice offends the stated aims of the Act to encourage competition, especially price competition. Competition between suppliers of goods and services is what provides the best price for the consumer. [5.400] 233

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Section 96A also now creates the offence of resale price maintenance in relation to services. The Act does allow the supplier to set a maximum price for the resale of goods or the resupply of services. A supplier may also recommend a resale price for the goods or services (see s 97). Take for instance the “recommended retail price” which appears on the back of most books. This must be a genuine recommendation and not a “sham” to avoid the Act. Giving an inducement not to sell below a specified price is a breach of s 48. Refusal to supply goods unless a specific retail price is charged would also be a breach. In Trade Practices Commission v Penfolds Wines Pty Ltd [1991] ATPR 52,078 (41-071), the court noted that the test was whether the supplier specified a price for its product and tried to persuade or bind not to sell at a price lower than that specified. Discussion designed to secure an increase in a retailer’s prices was not a breach if the supplier did not specify a minimum price. Case study [5.410] In ACCC v Jurlique International Pty Ltd [2007] FCA 79 (8 February 2007) the Federal Court imposed a very high penalty of $3.4 million for resale price maintenance against cosmetics/skincare company Jurlique (J) and its founder. The court found that J had: 1.

tried to induce retailers not to sell J’s products at prices less than the prices specified by J from time to time;

2.

entered into agreements to supply J’s products on condition the products were not sold for prices less than the price specified by J;

3.

withheld supply of J’s products because retailers had sold the products at prices below the retail prices specified by J; and

4.

issued statements in relation to prices below which the products were not to be sold.

In addition the Court granted injunctions for five years against J and its founder from engaging in such conduct in relation to J products.

[5.420] In Trade Practices Commission v Dunlop Australia Ltd (1980) 43 FLR 434, Dunlop supplied Adidas sports products. One of Dunlop’s customers advertised price reductions substantially below Dunlop’s recommended retail prices. An executive of Dunlop told the retailer that Dunlop would refuse to supply the products unless the advertising was stopped. The court held that the executive and the company were in breach of s 48 of the TPA and imposed substantial fines. In Trade Practices Commission v Sony Australia Pty Ltd (2000) ATPR 41-031, a Sony executive made a statement to a discounting wholesaler: “Now everyone we have been quoting under $3,999 does not get supplied at this stage”. This statement so blatantly breached the Act that it resulted in three separate

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successful actions by TPC against Sony – a $250,000 penalty under s 76 of the TPA against the company and individual fines for two Sony executives. Case study [5.425] In ACCC V IGC Dorel Pty Ltd [2010] FCA 1303 (10 December 2010) the manufacturer of Bettini products issued recommended retail price (RRP) lists with its products advising that the products had a great reputation and were of the highest quality that fitted the RRP. No discounts was the company policy for that reason. Any retailer found to vary (even slightly) under the RRP would have their stock removed immediately and further deliveries stopped. The company and its founder admitted liability and penalties totalling $100,000 were imposed for resale price maintenance. Section 97 of the CCA clarifies what is meant by the term “statement” when referring to a statement about the minimum price of goods. It can include the price, labelling or packaging in which the goods are supplied, and even documents such as business letters, which refer to the goods. Section 100 sets out evidentiary requirements that may establish whether or not the defendant has engaged in resale price maintenance.

Section 98(2): loss leadering [5.430] Section 98(2) of the CCA provides a possible defence for conduct that may otherwise breach the resale price maintenance provisions. Loss leadering involves selling goods or services at a price below invoiced cost to attract the purchase of other goods. The court accepts that a manufacturer could argue that such conduct would have a detrimental effect on market image for its product. In such circumstances it would not be unreasonable to refuse to supply further goods. Under s 98(3) genuine clearance sales do not fall within the loss leader defence.

ACQUISITIONS Section 50: prohibition of acquisitions that would result in a substantial lessening of competition [5.440] Section 50 prohibits a corporation or a natural person from directly or indirectly acquiring shares in another corporation or the assets of a person if it is likely to substantially reduce competition in a market. This section would apply equally to a takeover of a company or the merger of companies. The ACCC has issued guidelines for companies that wish to merge. These may be found in s 50(3) and include, but are not limited to factors such as the: • actual and potential level of import competition in the market; • height of barriers to entry to the market; • level of concentration in the market; • degree of countervailing power in the market; [5.440] 235

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• likelihood that the acquisition would result in the acquirer being able to significantly and sustainably increase prices or profit margins; • extent to which substitutes are available in the market, including growth, innovation and product differentiation; • likelihood that the acquisition would result in the removal from the market of a vigorous and effective competitor; and • nature and extent of vertical integration in the market. In some instances, the acquirer could seek authorisation where it could demonstrate that public benefit outweighed significantly any anti-competitive effects of the merger or acquisition. Consider this example: the takeaway food market appears dominated by several chains: McDonald’s, Kentucky Fried Chicken, Pizza Hut, and so on. A potential merger between McDonald’s and Pizza Hut might appear at first to present difficulties under the section, but would there be a reduction in competition? Probably not, because there are many smaller outlets that are effective competition. There also are few barriers to new entrants into the market. It is not difficult to set up hamburger and pizza shops either on a small or large basis. Suppose, however, that two major breweries in Australia wished to merge. The courts would almost certainly reject such a proposal under s 50. The Australian beer market is dominated by two breweries. If they merged there would be no effective competition and it would be extremely difficult for others to enter the market. In David Holdings Pty Ltd v Attorney General (1994) 49 FCR 211, Drummond J in the Federal Court noted (at 248) that the potential for price rises to consumers might also be relevant: If the price rises identified as likely to flow through to consumers as the result of a merger, being rises which the merging firms could not otherwise sustain individually can be seen to constitute a real or noticeable, as opposed to a trivial detriment to consumers, that will, in my opinion, be sufficient to bring the proposed merger into conflict with s 50.

ACCC has provided detailed guidelines for mergers. ….The Merger guidelines 2008 were publicly released on 21 November 2008. These revised guidelines outline the analytical and evaluative framework the ACCC applies when reviewing mergers under the Act. The guidelines provide guidance on the factors the ACCC considers relevant to its consideration of mergers and include discussion of the issues relevant to enforceable undertakings. The guidelines do not have any legal force in determining breaches of the Act–final determination on the issues is a matter for the courts… (Source: http://www.accc.gov.au/media-release/revised-merger-guidelines-issued-0.)

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EXCEPTIONS Section 51: exceptions [5.450] Section 51 says that the above prohibitions do not apply to: 1.

conduct specifically authorised by legislation;

2.

industrial agreements about working conditions;

3.

non-competitive provisions in contracts, such as clauses in restraint of trade;

4.

contracts requiring compliance with prescribed standards;

5.

partnership agreements;

6.

consumer boycotts; or

7.

arrangements about patents or copyright.

Also, s 51(2)(g) of the CCA sets out the exemption for export agreements for breaches of most sections of Part IV of the CCA (which contains prohibitions on anti-competitive practices).

AUTHORISATIONS Section 88: power of Commission to grant authorisations [5.460] The Act allows the ACCC to grant authorisations for conduct that would otherwise be in breach of the Act. Authorisation can be interim or permanent. The Commission can also vary or revoke any authorisation. The authorisation should be granted only where the benefit to the public would outweigh any detriment. Authorisation is only possible for some of the activities prohibited. The Commission must consider that the public benefit resulting from the conduct outweighs any anti-competitive effects It is not available for s 46 conduct, misuse of market power. Guidelines are available for authorisations: http://www.accc.gov.au/ publications/authorisation.

NOTIFICATION Sections 93–93A: notification of exclusive dealing [5.470] The Act also allows parties to notify the Commission of certain conduct. If this is done, the parties are not in breach of the Act unless the Commission advises them that they should cease the notified conduct. Notification is available in respect of exclusive dealing (s 47), collective bargaining and private disclosure of pricing information although there are more stringent procedures attached to third line forcing. There is a prescribed [5.470] 237

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period (14 days for notifications received after 30 June 1996) after which immunity from prosecution will be granted in respect of third line forcing only. Note that the ACCC can revoke a notification at a later time if it considers that the anti-competitive aspects of the conduct outweigh any public benefit. Such revocation usually results from a detailed examination of the market impact of the conduct. It is also possible to obtain a collective bargaining notification. This occurs where two or more competitors come together to negotiate terms and conditions (which can include price) with a supplier or a customer (the target). It is also possible for the competitors to appoint a negotiator to act on its behalf. Industry associations can do this for members. The notifier is protected from legal action 14 days after lodgment of the collective bargaining notification with the ACCC. Of course the ACCC can object to the notification, but it must do so within the 14 day period. The criteria in general applied by the ACCC in assessing the application will be “does the public benefit outweigh its anti-competitive effect”? Case study [5.480] In BMW Australia Ltd [1998] ATPR (Com) 55-001, BMW notified ACCC that it had acquired the Rover company. In so doing, it required some rural dealerships to acquire a Rover dealership as well. BMW argued that a double dealership would be economically more viable for BMW in regional areas and allow BMW to compete more effectively. The ACCC rejected this argument and revoked the notification

INTRODUCTION OF THE AUSTRALIAN CONSUMER LAW [5.490] On 24 May 2008 Affairs (MCCA) agreed to commence work on a new national consumer law for Australia. This was largely a reflection of the diversion of the law in the States and Territories, which varied greatly in their application and scope. (See Figure 5.1.) Included in this development process was a national consumer product safety system. The Intergovernmental Agreement for an Australian Consumer Law (IGA) was signed by members of the Australian Council of Governments on 2 July 2009. In particular, Recital “E” described the objectives as follows: The new national consumer policy framework consists of the following key elements: 9)

a national consumer protection law based on existing consumer protection provisions of the Trade Practices Act and also including:-

10)

provisions regulating unfair contract terms,

11)

new enforcement and redress powers, and

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12)

new provisions based on best practice in State and Territory consumer protection laws;

13)

a new national product safety regulatory and enforcement regime; and

14)

improved enforcement cooperation and information sharing arrangements between Commonwealth, State and Territory Agencies.

The IGA provided that after the Australian Consumer Law (ACL) was enacted all State and Territorial jurisdictions in Australia would repeal or amend any legislation which conflicted with ACL. After the ACL was enacted, there would be a further review process for each jurisdiction to review their consumer legislation to ensure there were no conflicts between existing statutes and the ACL. Figure 5.1: Diagram of State and Territory legislation

Source: From Treasury documents The Australian Consumer Law - An Introduction, April 2010

Commencement of the ACL [5.500] The first day of January 2011 can be considered an important date in the legal development of Australian competition and consumer protection. On that day, the Trade Practices Act 1974 (Cth) (TPA), and consumer conduct of businesses, was finally replaced by the Competition and Consumer Act 2010 (Cth) (CCA). [5.500] 239

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After the introduction of provisions regulating unfair terms in standard form consumer contracts in July 2010, Australia received (for the first time) uniform consumer protection legislation that applied across all States and Territories. The Australian Consumer Law was implemented in two stages, by the Trade Practices Amendment (Australian Consumer Law) Act (No 1) 2010 (Cth) and Trade Practices Amendment (Australian Consumer Law) Act (No 2) 2010 (Cth). The Australian Consumer Law (ACL) is Schedule 2 to the Competition and Consumer Act 2010 (Cth). The ACL has been drafted in plain language to make its usage clearer and to reflect changes in drafting conventions made since the original Trade Practices Act in 1974. The ACCC continues its administrative /enforcement role pursuant to its responsibilities under the new consumer laws CCA.

THE CONSTITUTION AND THE ACL [5.510] Section 122 of the Constitution gives the Territories the power to make laws in respect of consumer protection matters. The States have a general power in this area also. In respect of financial products and services, the Commonwealth received power to make laws pertaining to these in respect of consumer protection matters through a referral of legislative competence from the States. This was set out in the Corporations Agreement 2002. (Consumer regulation was referred as a Commonwealth responsibility from the States and Territories in 2009. The Uniform Consumer Credit Code was replaced by the National Consumer Credit Protection Code from 1 July 2010. The ACL also applies to the conduct of corporations as suppliers of goods and services and to all interstate trade and commerce.

ENFORCEMENT OF THE ACL [5.520] Provision has been made for joint administration and enforcement of the ACL concurrently by both Federal and State courts and Tribunals and the Australian Competition and Consumer Commission (ACCC) and the following State and Territory bodies/agencies: • NSW: NSW Fair Trading • Victoria: Consumer Affairs Victoria • SA: Office of Consumer and Business Affairs • Qld: Office of Fair Trading • WA: Department of Commerce – Consumer Protection • Tas: Consumer Affairs and Fair Trading Tasmania • NT: Consumer Affairs 240 [5.510]

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• ACT: Office of Regulatory Services.

REGULATIONS UNDER THE ACL [5.530] Under the ACL the Minister is empowered to make regulations and other legislative instruments about specific matters, so that such matters can be dealt with administratively, rather than occupying parliamentary time. Such regulation-making powers of the ACL can include exempting certain persons from certain provisions of the ACL and applying certain parts of the ACL to certain specified persons.

HOW HAS THE ACL CHANGED THE LAW? [5.540] The new ACL has been enacted by all of the States and Territories. This means that there is a set of uniform consumer laws across Australia and the new laws extend not only to corporations and individuals involved with corporations but also to other organisations and individuals in their own right. The consumer protection provisions formerly found in Parts IVA, V, VA, VB and VC of the Trade Practices Act 1974 are now (largely) located in a Schedule (Schedule 2) to the Competition and Consumer Act 2010, known as the Australian Consumer Law (ACL). The important changes include: 1.

a renaming of the laws from the Trade Practices Act 1974 (Cth) (TPA) to the Competition and Consumer Act 2010 (Cth) (CCA);

2.

the introduction of a set of definitions in the ACL, some of which are different from the definitions used in the former TPA;

3.

the repeal of the TPA provisions dealing with various “unfair practices” (including the prohibitions against misleading and deceptive conduct and unconscionable conduct), which to some extent have been copied and expanded upon in the ACL under new section numbers;

4.

regulation of “unfair terms” in standard form consumer contracts (introduced on 1 July 2010);

5.

new “consumer guarantees” to replace the former implied conditions and warranties contained in the TPA;

6.

new regulations about “unsolicited consumer agreements”, which replace door to door sales and direct marketing;

7.

a new “product safety regime” including reporting of deaths or serious injuries in relation to the use of consumer goods;

8.

new national provisions dealing with information standards and lay-by contracts;

9.

extensive powers of enforcement/penalties and remedies including: • infringement notices • substantiation notices [5.540] 241

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• public warning notices • civil pecuniary penalties • disqualification orders. The Australian Government has produced a useful outline of the Australian Consumer Law in an information brochure titled “ACL: A guide to provisions” located at http://www.consumerlaw.gov.au.

HOW IS THE ACL STRUCTURED? [5.550] The full text of the ACL is set out in Schedule of the Competition and Consumer Act 2010 (Cth). The ACL is divided into “a variety of chapters” as follows: • Chapter 1 - Definitions and interpretation of key consumer law concepts • Chapter 2 - General protections - Standards of business conduct • Chapter 3 - Specific protection for consumers under certain unfair practices provisions • Chapter 4 - Offences • Chapter 5 - Enforcements and remedies. More detailed content of chapters is contained in [5.560] and following.

WHAT DO THE ACL CHAPTERS CONTAIN? Chapter 1 – introduction [5.560] Definitions and interpretation of key consumer law concepts: definition of “consumer”. The ACL generally provides protections to any person or corporation as a consumer of goods and services. In some cases, protections only apply to a defined class of “consumers”. Some provisions of the ACL are therefore limited to a defined class of “consumers” (there are policy reasons to limit the extent of consumer protection to the acquisition of goods and services to exclude certain commercial transactions). The definition of “consumer” in the ACL applies particularly to • consumer guarantees; • unsolicited selling; and • lay-by agreements. Section 3 of the ACL defines “consumer” as a person who: • acquires goods or services that are priced at less than $40,000; or 242 [5.550]

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• acquires good or services that are priced at more than $40,000 but they are goods/services “of a kind ordinarily acquired for personal, domestic or household use or consumption”; or • acquires a vehicle for use in the transport of goods on public roads, irrespective of price. In these matters s 3 of the ACL defines “consumer” in the same way as s 4B of the TPA. However in many other matters the protections provided by the ACL apply to all individuals and businesses, rather than being restricted to “consumers” as defined, where the relevant conduct is in trade or commerce. The former provisions of the TPA which dealt with unfair practices such as misleading and deceptive conduct (TPA s 52), unconscionable conduct, bait advertising, offering gifts and prizes etc remain largely unchanged but they have been removed from the body of the Competition and Consumer Act 2010 (CCA) and are now located in the ACL (Sch 2 of the CCA) and allocated different (new) section numbers. This means that section numbers and the order in which they appear within the ACL have now changed. Examples include: • What was misleading and deceptive conduct under s 52 of the TPA is now s 18 in the ACL. • The unfair practice of misleading /false statements about goods/services in s 53 of the TPA is now s 29 in the ACL. The ACCC issued a report from the ACCC chairman on 1 August 2012 stating that the ACCC had received in excess of 3,000 contacts from small businesses, franchisors/franchisees and most related to misleading conduct and false representations. Drawing on examples it was emphasised that the ACCC made great efforts to protect small businesses against unfair practices and this included moves to protect small business against misleading and deceptive workplace safety products.

Chapter 2 – general protections [5.570] Chapter 2 of the ACL provides “general protection” as shown in Figure 5.2 below.

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Figure 5.2: General practices

Misleading or deceptive conduct [5.580] The predecessor to s 18 (formerly s 52 of the TPA) was the most litigated section of the TPA and there have been many cases that involved the old law (which still have a direct relevance to the application and understanding of s 18 of the ACL). Section 18 of the ACL states: A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or likely to mislead or deceive.

(1)

This section simply imposes a standard of conduct in commercial activities. This section is very wide in its scope and is designed to be a catch-all provision that attacks any type of business conduct that misleads /deceives or has the potential to do so. It does not require intention and so a business may breach s 18 without meaning to do so. It is no defence to argue an honest belief or opinion (which cannot be substantiated) or a claim to have exercised due diligence. Legal action must be commenced within 6 years of the conduct and whilst the Act provides for civil remedies such as damages, injunctions, corrective advertising, apologies and compliance programs (as set out in Chapter 5) there are no fines. The essential elements are: (1) (2) (3)

There is a business or someone involved in trade or commerce that engaged in conduct. The conduct complained of occurred in “trade or commerce”. The effect of the conduct was either “misleading/deceptive” or “capable of being so”.

Once these three elements are present then anyone may bring a civil action for breach of the section. The complainant does not have to be a consumer but can include competitors or vigilant members of the public. 244 [5.580]

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Element 1: engaged in conduct [5.581] A business makes some statement/promise/representation, performs an act or omits to perform an act is engaging in the required conduct under s 18 of the ACL. Even silence has been held to constitute misleading conduct: Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd [1989] 89 ALR 539; [1989] FCA 246. In Education Equity Pty Ltd v Austock Funds Management Ltd [2012] VSC 69 the Court agreed that silence could amount to misleading or deceptive conduct where a party had a reasonable expectation of being informed.

Element 2: conduct in trade or commerce [5.582] Section 2 of the ACL defines trade or commerce as trade or commerce in Australia or between Australia and overseas and includes any business or professional activity. Conduct that occurs outside commercial activities may not offend s 18: Pilmer v Roberts (1998) 150 ALR 235 and Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594; [1990] HCA 17. This section targets conduct and does not require a contract.

Element 3: conduct must be misleading or deceptive or likely to be so [5.583] To prove a breach of s 18 of the ACL (formerly s 52 of the TPA) it must be established that the conduct was either misleading or deceptive or likely to mislead or deceive. To decide this question courts have adopted an “objective approach”. In Taco Company of Australia v Taco Bell Pty Ltd (1982) 42 ALR 177; [1982] FCA 136 the owners of a Taco Bell restaurant in Bondi had been operating since 1977 and objected to TCA opening a new chain of restaurants from the USA that used the same “Taco Bell”. The court recognised that TCA’s conduct was misleading under s 52 (now s 18) as the Bondi owner had been established first and had a strong reputation and the same names would mislead customers. In making its decision the court explained the way in which conduct was determined to be deceptive or misleading: 1.

identify the relevant section of the public targeted; and

2.

consideration must be given to all the members as a whole including the astute and gullible, intelligent and not so intelligent, the well educated and those with poor education levels, age and sex and vocations.

Is confusion the same as being misled or deceived? In McWilliams Wines Pty Ltd v McDonald’s Systems of Australia Pty Ltd (1979) 41 FLR 429; [1979] FCA 16 McDonalds objected to several newspaper advertisements by McWilliams showing photos of glasses of wine and a large bottle marketed under the name “Big Mac”. The Court agreed that although some customers might be confused about the wine and wonder whether there might be some connection between the two businesses this was not the same thing as being misled or deceived. The businesses were obviously engaged in entirely different products and unrelated to each other. [5.583] 245

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Since the introduction of s 18 there have been cases involving a variety of business activities that have given rise to claims of misleading or deceptive conduct. Case studies [5.584] In Google v Australian Consumer and Competition Commission (2013) 249 CLR 435; [2013] HCA 1 (6 February 2013) the ACCC alleged Google was engaged in misleading conduct in relation to its display of sponsored links created by or at the direction of advertisers. It claimed that the search engine operator had breached s 52 of the TPA (now s 18 of the ACL) by publishing or displaying links that contained misleading representations made by the advertisers themselves. The High Court unanimously held Google was not liable for such conduct as the links were the responsibility of the advertisers. Google did not create the sponsored links that it displayed and ordinary and reasonable users would have understood that the representations conveyed on the links belonged to the advertisers. Google must be seen to either “endorse” or “adopt” the representations before they can be held to have independently made the representations. They would not have concluded that Google had endorsed or adopted what was presented. French CJ, Crennan and Kietel JJ reaffirmed some well established principles about misleading or deceptive conduct including the following:

• deception is not necessary (ie there does not have to be intent); • consideration must be given to whether reasonable or ordinary members of the relevant consumer group would be misled or deceived;

• confusion (by itself) may not necessarily mean a member has been misled or deceived; and

• intermediates or agents which publish or pass on misleading representations of another party may only be liable for misleading/ deceptive conduct where it appears to ordinary and reasonable members of the relevant class that they have adopted or endorsed the representations. In Australian Competition and Consumer Commission v TPG Internet Pty Ltd (2013) 250 CLR 640; [2013] HCA 54 (12 December 2013) the ACCC claimed that TPG (which provided telephone and internet services to residential customers) launched a national advertising campaign offering to provide unlimited ADSL2+ broadband for $29.99/month. It was claimed the advertisements (which ran between September 2010 and November 2011) were misleading and in contravention of s 52 of the TPA (now s 18 of the ACL) because they conveyed the impression that TPG’s Unlimited ADSL2+ broadband internet service could be acquired at that cost when in fact this service could only be acquired with a “bundled” home telephone line for an additional $30 per month plus start-up costs. (This part of the advert was in small print and less obvious). The trial judge had to decide if the advertisements conveyed to reasonable members of the relevant class (ie consumers and potential consumers of broadband internet services) that TPG was supplying unlimited ADSL2+ for only $29.99 without the need to bundle service with the 246 [5.584]

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purchase of a home phone. Murphy J did not consider that the reasonable consumer would be expected to know that ADSL2+ required a landline at extra cost. He found TPG had engaged in “misleading conduct” as reasonable consumers would understand from the dominant part of the advertising that they could acquire the unlimited service without any obligation to obtain other services or incur extra charges (when in fact this was not the case). On appeal the High Court agreed with the trial judge and focused on the following factors:

• most of the prominent advertising was done by television (fleetingly) and so consumers did not have the opportunity to read or examine it carefully (compared to brochures);

• the general thrust of the advertising was important in deciding what was misleading; and

• the dominant message that was being delivered to consumers was also important in assessing whether it was misleading. This case suggests that where mass marketing is done using methods that do not provide opportunities to read/examine carefully (to overcome any misleading impressions) then the dominant/prominent purpose of the advertising is important in assessment of whether it was misleading.

[5.585] Misleading/deceptive conduct cases show a wide application of s 18 and can involve a wide spectrum of activities including: • Failure to disclose full insurance policy details: Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357; [2010] HCA 31. • Disclosure/statements to potential franchisees/lessees: Miletich v Murchie [2012] FCA 1013. • Advising on investments in financial products: Wingecarribee Shire Council v Lehman Brothers Australia (in liq) (2012) 7 BFRA 1; [2012] FCA 1028. • Product comparisons: Eveready Australia Pty Ltd v Gillette Australia Pty Ltd [2000] ATPR 41-751; [1999] FCA 1824. • Protection of merchandising rights: Hogan v Koala Dundee Pty Ltd (1988) ATPR 40-902. • Promoting sale of real estate: Henderson v Pioneer Homes Pty Ltd (1980) 29 ALR 597. • Post contractual misrepresentations: Thomson v STV Pan Ocean Co Ltd [2012] FCAFC 15. • Guarantee prediction for powerball numbers: ACCC v Powerballwin.com.au Pty Ltd [2010] FCA 378. • Mobile network coverage: ACCC v Telstra Corporation Ltd (2007) 244 ALR 470; [2007] FCA 1904. [5.585] 247

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• Making predictions or offering opinions: Rakic v Johns Lyng Insurance Building Solutions (Victoria) Pty Ltd (Trustee) [2016] FCA 430. The section is also used to reinforce the need for advertising to be accurate in topical areas such as “free range” eggs. In ACCC v Snowdale Holdings Pty Ltd [2016] FCA 541 the court fined Snowdale $300,000 for falsely representing that hens could wander and lay eggs in the open because the actual nature of the farming conditions largely precluded them from doing so.

Does s 18 of the ACL apply differently than the former s 52 of the TPA? [5.586] The effect of s 18 remains unchanged and, applies in the same way under the ACL as s 52 of the TPA. This means that the existing laws and decisions relating to s 52 remain relevant and applicable under the ACL. Conduct prior to the ACL is covered by s 52 and s 18 catches activities after 2010. Whilst enforcement often requires court action potential misleading/ deceptive practices can be avoided by mutual cooperation. On 25 July 2012 the ACCC reported that South Australian refrigeration contractor Equipserve Solutions Pty Ltd had acknowledged contravention of both ss 18 and 29 of the ACL. This related to false statements made by the company which justified increases in the cost of refrigeration gas to the carbon price. The company undertook to send corrective notices directly to affected customers and post corrections on its website. It also agreed not to engage in similar conduct in the future and implement a trade practices compliance program including staff training. On 3 August 2012 the ACCC reported that five leading audiovisual manufacturers had agreed to change their promotional material after the ACCC raised concerns about the use of the words such as “WiFi ready” and “Wireless LAN Ready”. These terms were capable of misleading customers into believing that their products were all capable of accessing the internet wirelessly without the need to purchase any further devices. This was not correct because in some cases consumers had to buy an adaptor for $120. The ACCC stated that “consumers should be able to trust that what’s represented on promotional material is what they will actually get”. The companies cooperated positively and changed their marketing practices to ensure consumers were fully informed about the WiFi accessibility of their products.

Unconscionable conduct [5.590] The principle that contracts could be set aside because of unconscionable conduct was developed by equity in the courts but there is now statutory unconscionability under the ACL (formerly the Trade Practices Act). There are two forms of unconscionable behaviour that are prohibited by the ACL: 1.

unconscionable conduct generally; and

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unconscionable conduct in the supply or acquisition of goods or services to or from another person (except a listed public company).

The ACL sets out principles about unconscionable conduct and assists both consumers and businesses in understanding what unconscionable conduct is all about. • Unconscionable conduct in general terms refers to any conduct that is against good conscience /harsh/oppressive. • Whilst the ACL unconscionable provisions apply to many commercial matters they do not apply to the provision of financial services. These are covered by the Australian Securities and Investments Commission Act 2001 (ASIC Act) that contain similar provisions. Section 20 of the ACL (formerly s 51AA of the TPA) provides the broad prohibition of unconscionable conduct which may apply at common law or in equity. It allows the remedies under the ACL to be available for unconscionable conduct within “the meaning of the unwritten law from time to time”. This means conduct as defined under case law. This applies the principles such as those in the Amadio case to business disputes (in trade or commerce). Whatever the courts have defined as unconscionable conduct is also prohibited by the ACL. The ACCC can bring proceedings for remedies under the ACL. Section 21 of the ACL (formerly s 51AB of the TPA) provides that a person must not, in trade or commerce, in connection with the supply of goods or services to another person, engage in conduct that is, in all circumstances, unconscionable. Whilst s 21 can assist “consumers” from aggressive selling practices it is not limited to conduct to a consumer nor is it designed only to protect people under a “special disadvantage”. What is the precise /meaning of unconscionable? In Hurley v McDonald’s Australia [1999] FCA 1728 at [22] it was stated to involve things: “not done in good conscience”. In general terms it has been accepted that unconscionable conduct must be more that simply being unfair or unreasonable and must include some degree of immorality. To assist in determining whether conduct is unconscionable s 22 supplies a checklist of factors for statutory unconscionable conduct (see [13.670] (Miles) ) and the ACCC provides a variety of information on unconscionable contracts on its website: http://www.accc.gov.au. In a significant decision about unconscionable conduct provisions in the ACL, the Full Federal Court in August 2013 sounded a warning to business to review their ongoing business practices and avoid the risk of unconscionable conduct. In Australian Competition and Consumer Commission v Lux Distributors Pty Ltd [2013] FCAFC 90 (15 August 2013) Lux (L) was alleged by the ACCC to have engaged in unconscionable conduct in respect of three separate dealings with elderly women. In a pretext of conducting “free maintenance checks” L called [5.590] 249

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each customer and attended their homes and used lengthy selling techniques to pressure them into buying new vacuum cleaners. It was clear the practice was simply a means to guarantee sales. Two of the transactions occurred in 2010 (before the ACL) and the third took place in 2011. At trial Jessop J found L had not engaged in unconscionable conduct but on appeal the Full Court disagreed. In a unanimous decision the Court concluded that L had concealed the real reason for the visits ie to sell cleaners (not to conduct free maintenance checks) and this was deceptive conduct from the beginning and this had tainted all the transactions that followed. L breached s 51AB of the TPA in the first 2 dealings and breached s 21 of the ACL in the last transaction. To be unconscionable meant it was against conscience by reference to the norms of society and as such dealings had to be both “honest and fair”. Consumer protection measures were designed to enhance these social norms of fairness and elimination of aspects of vulnerability. It was unconscionable to conduct sales by pressuring elderly women over more than an hour of practised selling techniques and this opportunity was gained by deceptive means. (Note: Lux has applied for special leave to appeal to the High Court against this decision). Remedies for breaches of the unconscionable conduct prohibitions include: • injunctions; • damages; and • compensatory orders. Civil penalties include $1.1 million for a body corporate and $220,000 for an individual.

Publishing companies and director to pay $500,000 in penalties for unconscionable conduct and harassment 20 September 2012 The Federal Court in Brisbane has ordered three publishing companies to pay penalties totalling $400,000, and the companies’ director, Mr Andrew Clifford, to pay $100,000 after they admitted that they had engaged in misleading and deceptive conduct, harassment and coercion, and unconscionable conduct in relation to advertising services that were never requested or provided … “This outcome confirms the ACCC’s position that the conduct of companies, and their directors, who mislead people into entering agreements they never intended to and then repeatedly demand payment from them can amount to unconscionable conduct and harassment,” ACCC Chairman Rod Sims said today. “It also sends a strong message that the ACCC will use its powers to take action against companies that make a living out of deceiving small businesses.” “The ACCC has just released a Business Snapshot on Unconscionable Conduct. The publication contains information about what unconscionable conduct means and tips on how to avoid engaging in the conduct or becoming a victim of it,” said Mr Sims. (Source: http://www.accc.gov.au/publications/business-snapshot/unconscionable-conduct.)

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The ACCC website provides valuable information in relation to consumer protection and policies. There are various videos and other informative material available.

Chapter 3 – specific protection Part 3-1 – unfair practices Division 1 – false or misleading representations about goods and services [5.620] One major objective of the ACL is the promotion of true and correct information in the marketplace and as such, businesses are prohibited from making false or misleading statements/representations. The false or misleading representations are in s 29(1)(a)–(n) and include false or misleading representations about: • quality/standard of goods and services; • newness of goods; • testimonials about goods/services; • characteristics/uses of goods or services; • sponsorship/approvals; • conditions/warranties/rights; and • price of goods or services. Businesses that contravene s 29 of the ACL may be liable (in a civil action) for damages to anyone who suffered a loss. The complainant is not limited to consumers but includes competitors or anyone else. At the same time criminal prosecution may be taken against the business and could lead to fines of up to $1.1 million for a company. Case study [5.630] In ACCC v The Jewellery Group Pty Ltd (No 2) [2013] FCA 14 (18 January 2013) Justice Lander in the Federal Court of Australia fined The Jewellery Group (trading as Zamel’s) $250,000 for misleading consumers about savings made on jewellery, thus breaching ss 52 and 53(e) of the Trade Practices Act 1974. The ACCC considered the decision to be “significant” in that it emphasised the care that needed to be taken for retailers promoting sale items in catalogues, together with the extent of the alleged savings to be had in purchasing the items. The savings were allegedly on 44 items in sale periods (between November 2008 and May 2010) and the items were advertised nationally, as well as on Zamel’s website. Justice Lander stated in his judgment that the $250,000 penalty imposed reflected how seriously he viewed the conduct. His Honour stated “Zamel’s [5.630] 251

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should be deterred from engaging in any further conduct of this kind. Moreover, the penalty must be sufficient to deter any like-minded retailer from engaging in the same conduct”. As part of the judgment against it Zamel’s is also required to publish corrective notices in newspapers, on its website, and to implement a trade practices compliance program and pay the ACCC’s costs.

Case study [5.640] ACCC v Apple Pty Ltd [2012] FCA 646. In June 2012 Apple was fined over $2.25 million for false claims that its iPad with WiFi + 4G could connect to networks in Australia. In fact it could not connect to any network in Australia which had promoted themselves as 4G Networks. Apple made these claims on its website, online stores and supplied literature to Apple resellers making such claims. Apple refused to change its advertising even after being made aware that the claims were incorrect. The ACCC media release commented that the ACCC had taken legal action against a number of large companies to make sure that their advertising and promotional material did not mislead consumers. In the Apple case Justice Bromberg had stated that Apple’s conduct had been serious and unacceptable and had misled the public about the characteristics of their products in breach of s 33 of the ACL. In addition to the penalty of $2.25 million, Apple was ordered to pay the ACCC $300,000 contribution towards its costs.

[5.650] On 1 August 2012 the ACCC issued a notice on its homepage that a fitness club paid ACCC’s first infringement notice for a carbon claim. In April 2012, GFC Berwick Pty Ltd trading as Genesis Fitness Club sent letters to over 2000 members offering “rate freezes” on extended contracts to avoid expected increases of 9-15% due to carbon prices. Over 200 members took up extended contracts The ACCC claimed there was no reasonable basis for claiming the carbon price would result in such increased costs in membership and that the false claims encouraged members to sign lengthy extensions they did not require. The ACCC chairman Ron Sims stated that whilst businesses were free to set whatever prices they saw fit they had to carefully consider the basis for making carbon price claims and make sure those claims were truthful and had some reasonable grounds to support them. The ACCC issued an infringement notice for $6,600 as it reasonably believed the company had contravened the consumer protection laws. The company paid the amount and wrote to all affected members offering them the chance to withdraw from the extended contracts. Note that payment of infringement notice penalties is not an admission of contravention of the ACL. 252 [5.640]

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Concurrent application of consumer laws? [5.660] What laws would apply in relation to practices conduct that occurred both before and after the introduction of the new ACL? On its website in July 2012 the ACCC issued a public notice concerning a victory for the ACCC in the case of ACCC v Metricon Homes Qld Pty Ltd [2012] FCA 797 where the Federal Court in Brisbane ordered Metricon Homes Qld Pty Ltd to pay $800,000 in penalties and $50,000 for costs incurred by the ACCC after the building company had admitted to false and misleading advertising. Various misrepresentations had been made between January 2009 and August 2011 (ie both before and after the introduction of the ACL) in the company’s advertising brochures and on its website including: • misleading photographs of swimming pools (bali huts were not included in the package) • misleading prices of houses (some prices were not available) • and misleading “building time” guarantees (these did not automatically apply to most houses). Justice Collier found that senior management had participated in the conduct and that the company’s competition and consumer compliance programs had failed to stop it. Consumers had been misled about the value and prices of the houses and package deals. In addition to the monetary penalties the court declared that the company had breached ss 52, 53(a), 53(e) and 53(g) of the TPA. In relation to the conduct after 1 January 2011 the court found the company had breached the equivalent ss 18, 29(1)(a) and 29(1)(m) of the ACL. It accepted Metricon’s undertakings that for the next 3 years it would not make any similar promotions /statements. This case is evidence that courts apply both the former and current consumer laws depending on the date of the misconduct (see also ACCC v Lux at [5.590].

Other unfair practices prohibited by the ACL [5.670] Other specific types of unfair practices/conduct prohibited by the ACL are: • Section 30 prohibits false or misleading representations about land sales or auctions. • Section 31 targets misleading conduct relating to employment. • Section 32 (formerly s 54 of TPA) relates to the offering of rebates, gifts, prizes in connection with the supply of goods or services to a consumer and that offering must be honoured either within the time specified in the offer or within a reasonable time. This new section of the ACL has expanded the scope of s 54 by placing a “time” requirement for the supply of free items. A defence is also provided in the section where failure to provide the item was not the supplier’s fault. [5.670] 253

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• Section 35 (formerly s 56 of TPA – Bait advertising). This new ACL provision is similar to the bait advertising provision in the TPA. Disclosure of the time period of a “special offer”, or a limit of the number of available items at the “special price” would assist compliance with this section. • Section 36 (formerly s 58 of TPA). A person should not accept payment for goods or services if the person does not intend to supply the goods or services, know they cannot supply the goods or services or cannot supply the goods or services in a timely manner. As with s 32, a defence is provided for a supplier in this section if the supplier has exercised due diligence, and despite this is unable to supply due to circumstances beyond his/her control.

Division 2 – unsolicited supplies [5.680] Section 39 – credit and debit cards should only be sent on request. Section 40 – a person cannot claim a right to payment for unsolicited goods and services. Section 43 – a person cannot claim a right to payment for unauthorised entries or advertisements. Note that s 10 of the ACL requires a trader to issue a prescribed warning statement in documents that purport to be invoices for unsolicited goods or services, and for unauthorised entries or advertisements. The warning statement should clarify the fact that the “invoice” is not a demand for payment. A further application of s 43 is that it will not apply to publications with an audited circulation of 10,000 copies or more per week. A person is not required to pay for unsolicited goods which are supplied to them. However if the recipient wilfully damages those goods, then he/she may be liable for such damage (s 41). The same rights apply in s 42 in respect of unsolicited services. The sender is also entitled to retrieve the unwanted goods.

Division 3 – pyramid schemes [5.690] Section 44 states that a person must not participate in, or induce participation in, a pyramid scheme. Section 45 defines a pyramid scheme and associated concepts. Section 46 addresses public need by differentiating between multi-level marketing schemes which are legitimate and pyramid schemes. Information and warnings about pyramid selling is available from the ACCC on their website http://www.scamwatch.gov.au.

Division 4 – pricing [5.700] Section 47 addresses the display by a supplier of goods having multiple prices. Where goods have more than one price, they must not be offered for sale at a price higher than the lowest marked or displayed price. This also applies to catalogues and advertisements and where a mistake is 254 [5.680]

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made in these, the error should be corrected by a suitable retraction of similar circulation to the original advertisement. Section 47 specifies that a quoted or advertised price of goods or services should be inclusive of all fees and charges.

Division 5 – other unfair practices [5.710] Section 49 prohibits referral selling, ie inducing a consumer to make a purchase on the basis that they will receive a future benefit or commission. Section 50 prohibits coercion of a consumer in connection with the supply, or possible supply of goods or services. Such coercion includes physical force and undue harassment.

Part 3-2 – consumer transactions [5.720] This Part covers consumer guarantees for goods or services, unsolicited consumer agreements and lay-by agreements.

Consumer guarantees [5.730] The implied conditions and warranties in consumer contracts found in ss 66 – 74 of the former TPA have been replaced by the following “consumer guarantees” Guarantees in relation to goods: ss 51 – 59 of the ACL and the equivalent sections in State and Territory Sale of Goods Acts. (See Topic 4, Sale of Goods). Guarantees in relation to services: ss 60–63 of the ACL. These new consumer guarantees apply to all supplies of goods and services to “consumers” ie they apply where the buyer is a consumer. These guarantees apply to • all goods or services acquired by a consumer that do not exceed $40,000 in value; or • all goods/services that are of a kind ordinarily acquired for personal, domestic or household use/ consumption. (Irrespective of the price.) These guarantees are not limited to the period of the manufacturer’s warranty and consumers can claim against either the supplier or the manufacturer. However, the guarantees do not apply where goods are bought for resupply/transformation in business and some do not apply to goods bought at auction. The guarantees include: 1.

the supplier has the right to sell the goods;

2.

the consumer will have a right to undisturbed possession of goods and goods will be free of undisclosed charges, securities and encumbrances;

3.

that goods will be of an acceptable quality and fit for purpose (free from defects); [5.730] 255

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4.

that goods will be fit for any purpose which is disclosed to the supplier or for which the supplier represents they are reasonably fit;

5.

that goods will correspond with their description;

6.

that goods will correspond with sample;

7.

there is reasonable availability of repair facilities and spare parts for a reasonable period after goods have been supplied;

8.

that the supplier will comply with any manufacturer’s express warranties;

9.

that services will be rendered with due care and skill;

10.

that services, and any product resulting from the services, will be fit for purpose;

11.

that services, and any product resulting from the services, will be of such a nature, quality, state or condition, as to reasonably achieve any desired result which a consumer makes known to the supplier that he or she wishes to achieve; and

12.

that services will be provided within a reasonable time.

These guarantees cannot be excluded by the trader/supplier. Where the supplier has failed to deliver a consumer guarantee the consumer can sue them. These consumer guarantees are enforceable under Part 5-4 of the ACL against both the supplier and manufacturer. Various remedies are provided for consumers in this Part.

failure to meet guarantees [5.735] If goods or services fail to meet a guarantee a consumer has rights against the supplier/manufacturer who must provide a remedy. Figure 5.3: Failure to meet guarantees

Major failure

→ →

Minor failure

→

Reject goods/get refund/replacement Ask for money for drop in value of goods/ services Repair /replacement /refund

Where there is a serious failure to comply with a guarantee a consumer can elect to reject the goods and obtain a refund or replacement or keep the goods and obtain compensation for the drop in the value of the goods. Where the failure is considered less serious a consumer can require the supplier to rectify (or a supplier may choose to refund or replace). Consumer protection agencies can take legal action on behalf of affected consumers when suppliers/manufacturers fail to meet their obligations under the consumer guarantees. The ACCC actively pursues traders who either fail to meet guarantees or mislead consumers in respect of their rights under such guarantees, as actions 256 [5.735]

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against a number of Harvey Norman franchisees duly demonstrated: https:// www.accc.gov.au/media-release/harvey-norman-franchisee-ordered-to-paypenalties-of-52000-for-false-or-misleading-representations-about-consumerrights.

Unsolicited consumer agreements [5.740] Part 3-2, Division 2 of the ACL has provisions that apply to the supply of goods and services to a consumer where the supply is a result of negotiations between a supplier and the consumer: • which take place either over the telephone or in the presence of each other, other than at the supplier’s place of business; and • where the consumer has not invited the supplier to make the call or come to that place for the purpose of those negotiations; and • the total price payable is either not ascertainable at the time the agreement is made or exceeds $100, if known. The ACL does not override industry specific regulation such as the Do Not Call Register Act 2006 (Cth) and the Telemarketing Industry Standard (see http://www.acma.gov.au). There are some key concepts in respect of unsolicited consumer agreements: • how suppliers must approach consumers; • what suppliers must disclose when selling contracts are made; • cooling off periods of 10 days and the right of termination after the termination of the cooling off period; and • what are suppliers’ obligations during a post-contractual period.

Lay-by sales [5.750] In respect of lay-bys, the ACL (ss 96 – 97(2)) sets out 5 basic rules for lay-by agreements: i)

Section 96 – A lay-by sale must be in writing and the purchaser must receive a copy. The section also defines a lay-by sale.

ii)

Section 97 – Consumers rights to terminate the lay-by are outlined

iii)

Section 98 – Sets out the circumstances in which a seller may terminate a lay-by sale

iv)

Section 99 – Provides guidelines for refund of monies paid on a cancelled lay-by and the rights of the seller to recoup termination costs.

v)

Section 97(2) – Outlines the sellers’ rights to charge a cancellation fee.

The ACCC has published guidelines for traders and legal practitioners in relation to selling practices, which include lay-by sales: http:// www.accc.gov.au/publications/sales-practices-a-guide-for-businesses-andlegal-practitioners. [5.750] 257

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Miscellaneous provisions [5.760] These deal with the right of a consumer to receive a proof of transaction for supply of goods or services > $75 and below that, upon request (s 100) and the right of a consumer to request an itemised bill within 30 days of receiving an account from a supplier (s 101).

Part 3-3 – safety of consumer goods and product related services [5.770] The ACL has product safety provisions that set out how the Australian and State and Territory governments can regulate consumer goods and product related services to ensure they are safe. They have recently established “Product Safety Australia” (http://www.productsafety.gov.au/) to allow consumers to check if a product has been recalled (http:// www.productsafety.gov.au/recalls). The ACL contains provisions relating to product safety, including provisions for interim and permanent bans for goods which will or may cause injury or the reasonably foreseeable use or misuse of which will or may cause injury and provisions for compulsory and voluntary product recall. Whilst the new regime is based on the TPA requirements, it includes additional characteristics imposed by COAG. These are: • A single national law on the safety of consumer goods; • The Commonwealth has sole responsibility for making national safety standards; • The Commonwealth, the States and the Territories have the right to make interim safety bans. These will last for 60 days and can be extended for up to another 60 days; and • All regulators have joint rights to enforce safety bans, standards and mandatory recalls. The safety regime also includes recommendations made by the Productivity Commission (2006 - Review of the Australian Product Consumer Product Safety System) that: • Product safety laws in all jurisdictions should cover services related to the supply, installation and maintenance of consumer products; • Product safety bans and recalls should cover goods that are of a kind which, under normal or reasonably foreseeable conditions of use, will or may cause injury to any person; • Suppliers should be required to report products which have been associated with serious injury or death (the report itself cannot be taken as an admission of liability in relation to the goods or the death or serious injury of any person); and • Governments have the power to undertake recall; directly where no supplier can be located to undertake recall. 258 [5.760]

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On line information about product safety issues is available via the Product Safety Australia website http://www.productsafety.gov.au.

Part 3-4 – information standards [5.780] These create national information standards for consumer goods and services. Sections 134 and 135 of the ACL give the Minister (Commonwealth) authority to prescribe information standards. Section 134 also states that standards are to be published on the internet. After the implementation of the ACL on 1 January 2011, this internet site is a product safety website maintained by ACCC (see http://www.accc.gov.au). Sections 136 and 137 state that it is a breach of the ACL to sell, offer to manufacture goods, or to supply or offer services which do not comply with information standards.

Part 3-5 – liability of manufacturers for goods with safety defects [5.790] This Part of the ACL sets out statutory rules which must be used to deal with consumer liability claims for defective products. A regulator may commence a claim, with the consent of an affected person against a manufacture for loss or damage. Sections 138 – 141 set out grounds for bringing a claim against a manufacturer for loss or damage. A manufacturer is also entitled to raise certain defences, which are contained in ss 142 and 148 of the ACL.

Chapter 4 – offences [5.800] Chapter 4 in the ACL provides criminal sanctions for breaches of some provisions of the ACL. Part 4-6 of the ACL provides defences that may be utilised. These defences are: • Reasonable mistake as to the facts and this includes reliance upon information provided by another; • Conduct of third parties where the person took reasonable steps to avoid that conduct; • Where an advertisement is published, and the publisher did not know or suspect that such advertisement was in breach of the consumer laws; • Goods that do not comply with safety or information standards and those goods or product related services are re-supplied, were not acquired from outside Australia, the person supplying them could not have known that the goods did not comply or relied on information from the vendor of those goods that there was no applicable standard. Part 4-7 of the ACL sets out certain procedural matters. These include limits of three years for the commencement of criminal proceedings after a breach and emphasis on payment of compensation to victims as opposed to the payment of fines. [5.800] 259

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(The following table is reproduced with the kind permission of The Treasury.) Table 5.1: Table of offences and fines under the ACL ACL provisions Part 4-1 Unfair Practices Part 4-2 Division 1 Consumer Guarantees Part 4-2 Division 2 Unsolicited consumer agreements Part 4-2 Division 3 Lay-by Agreements Part 4-2 Division 4 Miscellaneous Part 4-3 Division 1 Safety Standards

Part 4-3 Division 2 Bans on consumer goods and product related services Part 4-5 Division 3 Recall of consumer goods

Part 4-3 Division 4 Consumer goods, or product related services associated with death or serious injury or illness Part 4-4 Offences relating to information standards Part 4-5

Offences relating to substantiation notices

260 [5.800]

Maximum fine for bodies Corporate $5,000 for section 165 (multiple pricing) $1.1 million for all other offences $50,000 for section 169 (display notices)

Maximum fine for other persons $1,000 for section 165 (multiple pricing) $220,000 for all offences

$50,000 for all offences

$10,000 for all offences

$30,000 for all offences

6,000 for all offences

$50,000 for all offences

$10,000 for all offences

$1.1 million for all offences except: $22,000 for section 196 (requirement to nominate a safety standard) $1.1 million for all offences

$220,00 for all offences except: $4,400 for section 196 (requirement to nominate a safety standard) $220,000 for all offences

$1.1 million for compliance with recall orders $16,650 for sections 200 (Notification of persons who supply consumer goods outside Australia if there is no compulsory recall) and 201 (Notification requirements for a voluntary recall of consumer goods) $16,650

$220,000 for compliance with recall orders $3,330 for sections 200 (Notification of persons who supply consumer goods outside Australia if there is no compulsory recall) and 201 (Notification requirements for a voluntary recall of consumer goods) $3,330

$1.1 million for all offences

$220,000 for all offences

$16,500 for section 205 (compliance with substantiation notices) $27,500 for section 206 (false or misleading information in response to a substantiation notice)

$3,300 for section 205 (compliance with substantiation notices) $5,500 for section 206 (false or misleading information in response to a substantiation notice)

$10,000 for section 169 (display notices)

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Chapter 5 – enforcement and remedies Part 5-1 – enforcement powers [5.810] After 1 July 2010 new powers were granted to the ACCC (including Substantiation Notices, Public Warning Notices and Infringement Notices) which are located in Part 5-1 of the ACL. The ACL provides broad powers for the Courts to make compensation orders for injured persons and for consumers who are not parties to proceedings. Among the remedial orders which can be made are orders varying contracts, refunding money and the return of property. The ACL provides a number of enforcement powers including: • Court enforceable undertakings • Substantiation notices – these are used when a regulator becomes aware of a representation that may contravene the ACL. It can require a person to provide information which may help support the claim. Generally a substantiation notice must be complied with within 21 days • Public warning notices – a regulator can issue these notices to advise the public about detrimental conduct (s 223 of the ACL). Guidelines and form of infringement notices can be found at http:// www.accc.gov.au/accc-book/printer-friendly/29446. The following criteria must be present for a regulator to issue a warning notice under the section: • The regulator must have reasonable grounds to suspect that the conduct may constitute a contravention or provision of Chapters 2, 3 or 4 of the ACL. • The regulator must be satisfied that one or more persons has suffered, or is likely to suffer a detriment as a result of the conduct. • The regulator must be satisfied that it is in the public interest to issue such a notice.

Part 5-2 – remedies [5.820] A court may impose civil pecuniary penalties for breaches of the ACL. It should be noted that from time to time the Parliament reviews fines and penalties imposed by the courts. On 28 December 2012 the value of a penalty unit increased from $110 to $170. Publications that refer to penalty units will be reviewed and updated to reflect the increase ... The new penalty unit value will only apply to contraventions that occur on or after 28 December 2012. This means that the changes will not impact on contraventions that occur before 28 December 2012, or current proceedings for contraventions that took place before that date. The penalty unit value has not been adjusted since 1997. Under the new legislation, the value of the penalty unit will be reviewed every three years. (Source: http://www.accc.gov.au/publications/publications-under-review.) [5.820] 261

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The following table (reproduced with the kind permission of Treasury) sets out the maximum pecuniary penalties that may be imposed. Table 5.2: Maximum pecuniary penalties under the ACL Provisions Part 2-2 Unconscionable conduct Part 3-1 Divisions 1 and 2 Unfair Practices Part 3-1 Division 3 Pyramid schemes Part 3-1 Division 4 Pricing Part 3-1 Division 5 Other Unfair practices Part 3-2 Division 1 Consumer guarantees Part 3-2 Division 2 Unsolicited consumer agreements Part 3-2 Division 3 Lay-by agreements Part 3-2 division 4 Miscellaneous Part 3-3 Division 1 Safety standards Part 3-3 Division 2 Bans on consumer goods and product related services Part 3-3 Division 3 Recall of consumer goods Part 3-3 Division 5 Consumer goods or product related services associated with death/injury Part 3-4 Information standards Part 3-5

Liability of manufacturers for goods with safety defects

262 [5.820]

Maximum civil pecuniary penalty for bodies corporate $1.1 million

Maximum civil pecuniary penalty for other persons $220,000

$1.1 million

$220,000

$1.1 million

$220,000

$5,000 for section 47(1) (multiple pricing) $1.1 million for section 48 (component pricing) $1.1 million

$1,000 for section 47(1) (multiple pricing) $220,000 for section 48 (component pricing) $220,000

$50,000 for section 66(2) (display notices)

$10,000 for section 66(2) (display notices)

$50,000

$10,000

$30,000

$6,000

$15,000 for sections 100(1), 100(3), 101(3) or 101(4) $50,000 for sections 102(2) or 103(2) $1.1 million

$3,000 for sections 100(1), 100(3), 101(3) or 101(4) $10,000 for sections 102(2) or 103(2) $220,000

$1.1 million

$220,000

$16,500 for sections 125(4), 128(2), or 128(6) $1.1 million for sections 127(1) or (2) $16,500 for sections 131(1) or 132(1)

$3,300 for sections 125(4), 128(2) or 128(6) $220,000 for sections 137(1) or (2) $3,300 for sections 131(1) or 132(1)

$1.1 million for sections 136(1), (2) or (3) or s 137(1) or (2) $16,500 for section 221(1) (compliance with substantiation notices) $27,500 for section 222(1) (false or misleading information etc)

$220,000 for sections 136(1), (2) or (3) or 137(1) or (2) $3,300 for section 221(1) (compliance with substantiation notices) $5,500 for section 222(1) (false or misleading information, etc)

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Other remedies Injunctions

[5.830] Injunctive relief may be applied for by either a regulator or a complainant affected by conduct of a business, in order to prevent the business from breaching the ACL. The injunction can also be used to require a business to do certain acts (s 232). Damages

The court may grant damages to a person to compensate them for loss or damage they have suffered through breach of the (s 236). Compensation orders

The court may grant a compensation order to a person for loss or damage suffered through a breach of the ACL. Example of such orders may be found in s 43 and include orders to vary contracts, refund money, return property or pay compensation. Orders for non-party consumers

If other persons are affected by a breach of the ACL, but are not a party to proceedings relating to that contravention, a regulator may seek orders on behalf of those persons (s 239). Section 241 states that a person is not obliged to accept the redress offered to them under a non-party order, but if that person does so, they will forfeit any other right of action they may have. Non-punitive orders

Section 246 specifies that a regulator may apply for a non-punitive order from the court. The aim of these is to redress the harm caused by the contravention, rather than punish the offender. Punitive orders – Adverse publicity

Section 247 gives a regulator the power to seek an adverse publicity order which has the aim of deterring future breaches of the ACL. Such orders are punitive in nature and they are aimed at encouraging the target and others to comply with the ACL. Disqualification orders

Section 248 allows a court to disqualify a person from managing a corporation where that person has been involved in or caused a contravention of ACL provisions. Such person can include directors and other “officers” of a corporation.

Part 5-3 – country of origin representations [5.840] Part 5-3 of the ACL replaces Part V, Division 1AA of the Trade Practices Act 1974, which contained the existing country or origin defences. A new defence is built into the ACL in relation to the origins of goods, components or ingredients of goods being grown in a particular country. The ACCC has produced an online guide for business titled “Country of Origin Claims and the ACL”: see http://www.accc.gov.au/publications/country-of-origin-claims[5.840] 263

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the-australian-consumer-law. This provides information and examples to illustrate when businesses can say their goods are “Made in”, “Product of” or “Grown in” Australia, and includes advice on how a business can rely on the ‘safe harbour’ provisions in the ACL. The ACCC said the guidance also aims to clarify specific country of origin issues raised by various industries: see http://www.accc.gov.au/publications/country-of-origin-claims-the-australianconsumer-law/country-of-origin-claims-and-the-australian-consumer-law/ safe-harbour-defences.

Part 5-4 – remedies [5.850] It is a basic right of consumers to have a remedy in respect of goods or services they acquire which do not comply with implied conditions and warranties under the ACL but as a breach of contract. Under the ACL consumers of goods or services can seek either a refund, a replacement or repairs if a supplier fails to satisfy its obligations in respect of consumer guarantees. Manufacturers will also be obliged to pay damages to a consumer if the manufacturer fails to meet its guarantee obligations.

Part 5-5 – liability of suppliers and credit providers [5.860] Where a supplier, or linked credit provider: • makes a misrepresentation in relation to a sale contract or linked credit contract; • breaches a contract; • fails to comply with a consumer guarantee for those goods or services; • breaches an implied warranty for financial services; • there is a failure of consideration in relation to the contract; then that supplier or linked credit provider is jointly and severally liable to the consumer. Part 5-5 of the ACL replaces s 73 of the TPA whereby consumers retain a joint right of action to pursue supplies and linked credit providers jointly if the circumstances are appropriate. The effects of the breadth of the linked credit provider provisions in the ACL were tested in Quikfund (Australia) Pty Ltd v Prosperity Group International Pty Limited (in Liq) [2013] FCAFC 5. Equally, the decision proved useful to define the area of authority of agents to bind their principal in the financial environment relating to the provision of credit, particularly linked credit providers. Mr Jayson Croom was the Regional Manager of Technix and the Communications Manager for Queensland Communications Company (“QCC”) and in this capacity, claimed he was a representative of several other companies, including Australian Equipment Rental (“AER”) and Quikfund (Australia) (“Quikfund”). The respondent company (“Prosperity”) claimed it entered into a contract for the provision of telecommunications services with 264 [5.850]

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Axis Telecoms (“Axis”) and five separate equipment leases – four with AER and one with Quikfund. Prosperity relied on representations made by Mr Croom as to his authority in respect of the other companies and certainly, that installation of telecommunications equipment would reduce Prosperity’s outgoings, particularly in respect of telephonic charges. Prosperity sustained losses and sought to be relieved of liability under the contract entered into with Mr Croom and the resultant equipment leases. Whilst Mr Croom was in possession of documentation from AER and Quikfund, the Full Federal Court was not satisfied that it satisfied the “linked credit provider” provisions in s 73(14) of the Trade Practices Act 1974 under which these actions were brought. At paragraphs 109 and 110 of the judgment, the Full Federal Court said: At the very least, evidence establishing that the documentation had been supplied by Quikfund and AER to QCC for the purpose of being passed on to consumers was required. No such evidence was forthcoming. For all the Court knows, the relevant documentation may have been downloaded by QCC from the websites of Quikfund and AER without either corporation knowing that this had occurred. The fact that that documentation was available to be downloaded from the website by any member of the public would not be a basis for inferring an arrangement of the kind contemplated by s 73(14). The documentation may have been obtained in some other way. It is not for the Court to speculate about these matters. It was incumbent upon Prosperity to prove facts that constituted a proper basis for the Court to infer the existence of the requisite arrangement. It has failed to do so. 110. For these reasons, Prosperity failed to prove that either Quikfund or AER was a linked credit provider within the definition set out in s 73(14) of the TPA. Prosperity therefore failed to prove that s 73 of the TPA was engaged at all in the present case.

UNFAIR TERMS IN CONSUMER CONTRACTS – AN OVERVIEW [5.870] The unfair terms regime is embodied in Part 2-3 of the ACL and also Subdiv BA of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). It applies to standard form consumer contracts and renders void any provisions which are shown to be unfair. However, the standard form contract that contains unfair terms might still continue provided it is able to operate without the unfair terms. The ASIC Act applies to standard form consumer contracts for financial products and services. [5.880] A “consumer contract” is a contract for supply of goods or services or sale or grant of an interest in land to a person who is acquiring either of the above for mostly his/her own use. Whilst the ACL applies to consumer contracts generally the ASIC Act applies to contracts involving financial products or services. [5.880] 265

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“Standard form” contracts [5.890] There is no specific definition of these types of contracts in the ACL. However, such contracts would be in common general use in a particular industry or practice. Whether a contract is considered to be “standard form” depends subjectively upon evidence in a particular case. If a business seeks to show that a contract which is presumed to be “standard form” is not, in fact, standard form, then they must introduce evidence showing that it is not. In exercising its supervisory and regulation roles the ACCC investigated standard form contracts in various industries including telecommunications, airlines, fitness and car rentals and to a lesser extent travel agents and e-commerce operations. In fulfilling its educative responsibility, the ACCC has provided substantial information for the public on unfair contracts, making a number of resources available, such as “Consumers and unfair contract terms” (written publication). Several audio publications are also available at http://www.accc.gov.au).

What factors would be considered in evaluating whether a contract is “standard form”? [5.900] Examples of factors (the court’s consideration is not limited to these) which a court may consider in evaluating a contract are: • Who has the bargaining power in the contract? • Who prepared the contract? • Did one party have a requirement to reject or approve any particular terms in the contract? • Was negotiation of any terms possible? • Were particular circumstances or characteristics of either party taken into consideration? Under Part 2-3, s 27(2)(f) of the ACL the Minister also has the power to make regulations listing other matters for the courts to consider as to whether a contract is a standard form contract.

Are certain contracts exempt from the unfair contracts provisions? [5.910] Yes – certain shipping contracts, company constitutions (including managed investment schemes and other kinds of bodies) and contracts covered by the Insurance Contracts Act 1984 (Cth) (s 15) are not affected by the ACL provisions in respect of unfair terms. In addition, certain other terms are exempt from the unfair contracts regime: • terms which define the contract’s main subject matter; • terms which set up up-front consideration payable in the contract; • terms that are permitted by Commonwealth, States or Territorial laws of Australia. 266 [5.890]

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What is the meaning of “unfair”? [5.920] This word is defined in s 3 of the ACL and s 12BG of the ASIC Act. A term/provision is “unfair” if: • there would be a significant imbalance in the parties' rights and obligations under the contract if the term were applied; and

• it is not needed to be included to protect the interests of the party who would be advantaged under the term; and

• it would cause a detriment to a party if it were applied or relied upon. All of the above must be proven, under the civil test of balance of probabilities, for a court to decide that a contact term is unfair. These tests are applied taking into account the extent to which the provisions are transparent. On 30 July 2013 the ACCC achieved a victory in its first legal action based exclusively on the new unfair terms provisions in the ACL in the case of Australian Competition and Consumer Commission v Bytecard Pty Ltd VID301/ 2013 (filed 19 April 2013). B (better known as NetSpeed Internet Communications) was an internet service provider supplying internet connections, domain registration hosting and web designs. Its standard form consumer contracts contained the following terms: 1.

Clause 1.7 allowed B to unilaterally vary its prices under existing contracts without providing customers with any right to terminate the contract or negotiate (customers had no choice but to accept any price increases for up to 12 months).

2.

Clause 6 permitted B to unilaterally terminate the contract at any time with or without just cause or reason (“without cause or reason”).

3.

Clause 4 required B to be indemnified by customers even where the contract had not been breached or even if B has caused losses by its own breach of contract. (There was no similar indemnity in favour of customers.)

4.

A further clause that prevented the customer from terminating the contract unless they gave notice, paid all accounts and in some cases paid a cancellation fee or a minimum amount

The ACCC started proceedings against B for declarations that these terms were unfair under s 23 of the ACL. The Federal Court found these terms were unfair on the following grounds: They created a significant imbalance in the rights and obligations of the parties. If applied or relied upon by B they would result in detriment to customers. [5.920] 267

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They were not reasonably necessary to protect the legitimate business interests of B. This case cost B its own legal costs and at least $10,000 contribution to the legal costs of ACCC and more significantly, harm to B’s commercial reputation. In a media release by the ACCC on 30 July 2013 Chairman of the ACCC Rod Sims said that this case: … acts as a warning to business … The ACCC won’t hesitate to take action against businesses who continue to include unfair terms in their standard form consumer contracts … this matter is a timely reminder for all businesses to review their consumer contracts to ensure that potential unfair contract terms are removed or amended …

Although this case targeted some clauses relating to internet services there was a common thread to the contractual terms ie they were one–sided, wide reaching and vaguely worded.

“Transparency” [5.930] In evaluating a term or terms, the court must consider: • the extent to which a term is transparent and • the contract as a whole. “Transparency” (or the ease in which the meaning of the term may be understood) can be evaluated by looking at the following: • whether the provision is expressed in reasonably plain/clear language; • it is legible; • it is presented clearly; and • readily available to the party affected. Examples of provisions that may lack transparency might be ones which: 1.

are couched in highly technical terminology or complex legal language;

2.

comprise of very small print located on the back of a document and without notice being drawn to it; and

3.

are confusing or contradictory. Provisions/terms that are confusing, unclear or inconsistent are much more likely to be considered as “unfair” by the courts.

In Malam v Graysonline Rumbles Removals & Storage (General) [2012] NSWCTTT 197 a rather simple online transaction was held to have a lack of transparency in its terms. Firstly, the structure of the agreement was confusing and comprised of 13 pages. Several terms were inconsistent with each other. One provision stated that goods could not be returned whilst another stated goods could not be returned if they had first been examined. In Kucharski v Air Pacific Ltd [2011] NSWCTTT 555 an airline ticket printed with the words “non endnon ref” was found not to be clearly or legibly 268 [5.930]

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expressing the restriction that the ticket was non-refundable (even though other documents that came with the ticket did notify the fact it was nonrefundable). However, if a provision/term lacks transparency this does not mean that it will always be unfair. The whole contract must be evaluated to determine this issue.

How is the unfair contracts regime enforced? [5.940] Three agencies share responsibility for administering the new unfair contracts laws – the ACCC, ASIC and the various State and Territory consumer agencies. Also, if an individual consumer wishes to personally enforce their rights then they may do so.

Remedies for unfair terms [5.950] ACCC and ASIC can instigate class actions to join persons who are not parties to proceedings under the unfair contracts laws where they believe that the declared term has caused or is likely to cause a class of people to suffer loss or damage. State and Territories may also have such powers where the ACL is applied in their jurisdictions. …The ACCC, ASIC or a party to a standard form consumer contract may apply to the court for a declaration that a term of the contract is an unfair term (see Sch 2, Part 5-2, s 250 of the Act and s 12GBA of the ASIC Act). State and territory legislation also allows for similar actions by the relevant consumer protection agency or by consumers themselves. If a court makes a declaration that a term is unfair and a party subsequently seeks to apply or rely upon the unfair term, it is a contravention of the ACL or the ASIC Act, and the court may grant one of the following remedies:

• an injunction (Sch 2, Part 5-2, s 232 of the Act; s 12GD of the ASIC Act) • an order to provide redress to non-party consumers (Sch 2, Part 5-2, s 239 of the Act; s 12GNB of the ASIC Act)

• any other orders the court believes appropriate (Sch 2, Part 5-2, s 243 of the Act; s 12GM of the ASIC Act) …

In addition a business that has an unfair term in its own standard form contract with a consumer may be subject to further remedies under the ACL including: • public warning notices; • infringement warning notices; • civil pecuniary penalties up to $220,000 for individuals or $1.1 million for companies; and • substantiation notices (a supplier is required to supply information to substantiate their claims). (Source: http://www.consumer.tas.gov.au/fair_trading/unfair_contract_terms) [5.950] 269

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Revision to Unfair Contracts terms [5.960] From November 2016, Pt 2-3 of the ACL relating to Unfair Contracts will be extended to include small business. Included will be any business which employs less than 20 people and the contract is worth up to $300,000 in a single year or $1 million if the contract runs for more than a year. Also included is any standard form contract entered into or renewed on or after 12 November 2016. If a contract is varied on or after 12 November 2016, the law will apply to the varied terms. Under this new law, the courts will be able to strike out any unfair contract terms. For more information on the effects of the new laws, see http:// www.accc.gov.au/business/business-rights-protections/unfair-contract-terms.

Revision questions 1.

Ferrets Pty Ltd sells imitation fur to various manufacturers. Ferrets' products are widely recognised as being the best imitation fur product available. Confident of their product, Ferrets tells all of its customers that it will not supply them if they discount the finished product. Has Ferret breached any of the provisions of the Act?

2.

Alix Pty Ltd wants to acquire Susie Pty Ltd. They both manufacture sports accessories and hold together about 70% of the Australian market. Would the ACCC allow the merger? If not, why not?

3.

Hoxton Pty Ltd wants to seek an authorisation for a pricing structure for flying training in New South Wales. What are some of the factors that it will need to keep in mind if it applies to the ACCC for an authorisation?

4.

Why did the Federal government reform the previous Trade Practices Act?

5.

What do we mean by the term “applications law”?

6.

Why are insurance contracts excluded from the unfair contracts provisions of the ACL?

7.

In what circumstances might a business engage in unfair conduct that is actionable under both the former Trade Practices Act and the current ACL?

8.

What is a standard form consumer contract and why is it regulated by the ACL in relation to unfair terms?

270 [5.960]

TOPIC 6 Introduction to Torts (Negligence) Introduction.................................................................................... What are the elements of a tort? ......................................................... Intentional torts ............................................................................... Defences to intentional torts............................................................... Negligence ..................................................................................... Other situations where negligence recognised ....................................... Defences to negligence ..................................................................... Statutory torts ................................................................................. Statutory limits on actions arising from motor accidents........................... Breaches of statutory duty.................................................................. Statutory changes to negligence .........................................................

[6.10] [6.40] [6.70] [6.180] [6.240] [6.570] [6.690] [6.730] [6.750] [6.760] [6.770]

Extract from Miles C and Dowler W, A Guide to Business Law (21st ed, Lawbook Co., 2015), Chapter 3 (including updates for 2016).

Terminology • Causation: what caused the loss/damage; • Contributory negligence: the plaintiff was partly careless themselves; • Damages: legal remedy involving payment of money; • Legal liability: being held legally responsible; • Liability: responsible for; • Negligence: careless conduct/behaviour; • Occupiers: those who own or are in control of premises; • Proximity: closeness in time, space or relationship; • Remoteness: not likely to have been reasonably foreseen; • Remoteness of damage: damages/losses that would not have been expected by any reasonable person; • Res ipsa loquitur: the evidence speaks for itself; • Standard of care: amount of care expected/required by the law; • Tort: a civil wrong (other than a breach of contract) for which the main remedy is damages; • Tortfeasor: the person who commits a tort; • Vicarious liability: liability for the careless behaviour/conduct of others; • Volenti non fit injuria: agreeing to take/accept a known risk (voluntary assumption of a risk).

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INTRODUCTION [6.10] The word “tort” is derived from the French word meaning “wrong”. In our modern law a tort is now identified as a civil wrong. A tort recognises that there is some legal duty owed by one person to another which allows civil proceedings to be taken when that legal duty is broken. In tort, this duty arises irrespective of any contract. In general terms it is an act or omission by a person that in some way interferes with interests and rights of others. Those interests and rights are recognised by the law as requiring some form of protection. Normally the person whose interests and rights have been interfered with can claim damages or, if this is not appropriate, an injunction may be granted. A tort is different from the following conduct: • crimes; • contractual breaches; and • workers’ compensation.

Crimes are usually not torts [6.20] A crime is a wrongful act committed against social values, public standards and morality, eg a bank robbery or murder. For this reason crimes are dealt with by criminal proceedings in the name of the state. A crime is prosecuted by the Crown, representing society, and is punishable by such penalties as a fine or imprisonment. The prosecution bears the burden of proving the offender committed the crime in question. It must prove guilt beyond a reasonable doubt. This is called the criminal standard of proof. In some situations a criminal offence may also involve commission of a tort and can give rise to a civil claim based in tort; eg careless driving of a motor vehicle that results in injury to a pedestrian can be a criminal offence. Police may proceed against the driver for breach of the law and a court may impose fines/gaol or other penalty. On the other hand, the law of torts concerns the rights of individuals to compensation for wrongs suffered by them. The pedestrian could seek relief in proceedings brought in their own name and could sue the driver for compensation for their injuries, medical expenses, loss of income etc arising from the tort of negligence. Contractual breaches are not regarded as torts, although since both branches of the law originate in common law, the major remedy for breaches of both tort and contract is damage.

Contractual breaches are not regarded as torts [6.30] Contractual breaches are fully discussed in Chapter 15 (Miles). The time limits for taking proceedings in contract and tort operate differently. In an action for breach of contract, time runs from the moment of the breach. In torts, time generally runs from the time the damage becomes apparent. This can have important consequences for the parties. 272 [6.10]

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As an example, assume that the time limit is, as in most jurisdictions, six years. On 1 January 2010, Will contracts to build a house for Grace and to carry out the work with reasonable skill and care. On 1 March 2010, Will commences work but uses defective materials in building the foundations for the house. In legal terms Will has breached the contract at this time due to selecting and using defective materials. He completes the job in June 2010. In January 2018, the house falls down as a result of the defective foundations. Certainly Will has broken his contract but Grace cannot sue for breach of contract because more than six years have passed since the date of the breach. The breach took place on 1 March 2010 when he constructed the foundations with defective materials and failed to use reasonable care and skill. Luckily, however, Grace may have an action in the tort of negligence. Time starts to run from January 2018 because this was the time that the damage occurred. Grace can sue Will in tort for negligence and recover damages.

WHAT ARE THE ELEMENTS OF A TORT? [6.40] Except in those torts that involve strict liability, there must be some fault on the part of the defendant. This fault may either involve intent or carelessness. The defendant must have either intended to do the act complained of or must have been careless in some way. Strict liability, sometimes called absolute liability, means that the defendant is responsible for the damage caused, irrespective of fault.

Direct and indirect torts [6.50] One category of torts is that of direct or intentional torts. The plaintiff must prove that the tort was intentional in that the defendant intended to do the act complained of, and that the damage was the direct result of the defendant’s actions. The plaintiff does not have to prove damage, or that the defendant intended to cause damage. Negligence is an unintentional or indirect tort. It can be defined as the omission to do something which a reasonable person would do, or doing something which a careful or reasonable person would not do. In strict liability torts, the plaintiff does not have to prove fault. It is enough that the defendant did the act that caused the damage. An example of a strict liability tort is the tort of breach of statutory duty: see [6.750].

Survival of actions [6.60] At common law, the death of a plaintiff or a defendant before a verdict meant that the proceedings ended. Parliament has altered this common law rule. Legislation now generally provides that on the death of a person all causes of action by or against that person survive to the benefit or detriment of his or her estate. [6.60] 273

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Legislation also generally provides that upon the death of a person because of tortious conduct, certain classes of relatives, such as a spouse or children, may sue for damages arising from that person’s death.

INTENTIONAL TORTS [6.70] The law of torts is concerned with the protection of certain recognised rights and interests of the individual. The law of torts recognises that a person has certain rights and interests that need protection from interference by others. When you are sick your doctor will prescribe certain medicines to remedy your particular illness and the remedy will depend on the illness. Similarly, with the law of torts, there are various legal remedies available for infringement of your rights and interests depending upon the manner of interference and what rights were infringed. Some of the torts include the following. To protect your physical body: • assault; • battery; • false imprisonment; and • intentional infliction of nervous shock. To protect your land: • trespass against land; and • private and public nuisance. To protect your personal property (chattels): • trespass to goods; • conversion; and • detinue. To protect yourself from careless actions or omissions by others: • negligence. To protect your reputation: • defamation. To protect against dishonest/fraudulent statements intended to harm: • deceit; • injurious falsehood.

Assault [6.80] The plaintiff must show that the defendant intended and acted in a way that caused the plaintiff to anticipate the application of unlawful physical force, and that anticipation was reasonable. The fear of force must be reasonable, with the plaintiff viewed as “neither a hero nor a coward”. 274 [6.70]

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Examples of behaviour that would constitute this tort would include pointing a gun at a person, or verbally threatening a person with physical violence and acting in an aggressive manner.

Battery [6.90] Battery is the actual application by the defendant of physical force upon the plaintiff. The degree of physical force is not relevant and even slight application of physical force is sufficient.

False imprisonment [6.100] This is the total restraint of another person’s freedom of movement without consent or lawful excuse. There is no false imprisonment if there are reasonable means of escape. The imprisonment must be involuntary. This means that the plaintiff has not expressly or impliedly consented to the imprisonment. If the plaintiff consents to restraint of movement, and then reasonably withdraws that consent, continued restraint may amount to false imprisonment.

Intentional infliction of nervous shock [6.110] A person who wilfully does something calculated to hurt another and thus causes nervous shock, commits the tort of intentional infliction of nervous shock. In Wilkinson v Downton [1897] 2 QB 57, the defendant, as a joke, falsely informed a woman that her husband had been badly injured. He was held liable for damages. The damage suffered must be reasonably foreseeable. The principles of reasonable foreseeability are discussed later in this chapter. Further, nervous shock extends only to a provable psychiatric complaint; mere distress, embarrassment or humiliation is not enough.

Trespass to land [6.120] The tort of trespass is one of the great historic forms of action in the common law and is the basis of many modern torts. It is not as important today mainly because of the growth of the tort of negligence, and legislation that defines specific types of trespass. Trespass to land consists of unlawfully and without the express or implied consent of the plaintiff, entering or remaining on the plaintiff’s land, or putting, throwing or leaving something on the plaintiff’s land. It must be the direct result of a voluntary act. So, if Frank throws Margaret onto BJ’s land, it is Frank, not Margaret, who has committed a trespass. This topic is covered in more detail later in the chapter on property law.

Private nuisance [6.130] This tort protects the use and enjoyment of land by preventing unlawful interference. As the name suggests it usually involves unreasonable [6.130] 275

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conduct of a continuing nature that has an adverse effect on the enjoyment or use of private land. A nuisance may take a variety of forms including noise, smoke, tree roots, overhanging signs or other objects and even bright lights. There must be some actual damage caused by the conduct and it must be intentional or at least reckless. The owner can sue the offender for nuisance or apply for an injunction to stop the conduct. Basically, the elements to establish private nuisance are that the intrusion/conduct was substantial and unreasonable. Intrusions such as those indicated could be a private nuisance depending on length of time, severity of invasion, location and whether the conduct complained about had a useful social benefit.

Public nuisance [6.140] This involves an unlawful act or a failure to discharge a legal duty that adversely affects the safety, health, property or comfort of the public, or that obstructs the public in the use or enjoyment of a public right, eg obstructing a public freeway or pedestrian walkway may constitute a public nuisance. However, a party bringing proceedings in tort must show something above mere inconvenience. They must show they suffered a special damage/loss over and above any public inconvenience. The nuisance must have arisen after the plaintiff acquired the property subject to the damage. There is no nuisance if the defendant is acting in a normal and proper manner. Examples of particular damage are loss of customers, depreciation in the value of property, actual injury, and inability to get produce to market. The normal remedies for public nuisance are damages and injunctions.

Trespass to goods [6.150] A person who directly and unlawfully interferes with the use or possession of goods commits the tort of trespass to goods. The interference must be to actual use or possession. Usually where goods are removed damages are the full value of the goods, but in all other cases the damages are generally the loss actually suffered.

Conversion [6.160] John Fleming, in The Law of Torts (9th ed, LBC Information Services, 1998), p 60, has defined “conversion” as the: intentional exercise of control over a chattel which so seriously interferes with the right of another to control it that the intermeddler may justly be required to pay its full value.

The usual remedy for conversion is damages. The damages awarded are the value of the personal property (chattel). Upon payment, ownership of the chattel passes to the defendant. The plaintiff may sue for damages even where the chattel is returned. 276 [6.140]

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The action of conversion is commonly used where a person has wrongfully collected the proceeds of a cheque belonging to someone else. For example, Michael pays Paula $100 by cheque. Bob steals the cheque from Paula and cashes it at Michael’s bank. Bob has committed conversion of Paula’s cheque.

Detinue [6.170] A person who wrongfully retains or refuses to return a chattel upon request by the person entitled to immediate possession commits the tort of detinue. For example, Sally lends her video camera to Harry and Harry agrees to return it to Sally within a week. If Harry fails to return the camera after Sally has made her demands then Harry has committed detinue. The court has discretion to order return of the goods and/or award damages.

DEFENCES TO INTENTIONAL TORTS [6.180] There are several defences to intentional torts: • consent; • self-defence or the defence of others or of property; • unavoidable accident; • necessity; and • statutory authority.

Consent [6.190] It is a defence to an intentional tort to show that the plaintiff, expressly or by implication, consented to the acts. The consent must be a genuine consent and made with full knowledge of the facts.

Self-defence or the defence of others or of property [6.200] It is a good defence to show that the defendant acted in self-defence, in the defence of others, or in defence of property rights. The defendant’s actions must be reasonable, proportionate to the risk, and not involve the use of excessive force.

Unavoidable accident [6.210] Mistake is not a defence to an intentional tort but unavoidable accident is a good defence. For example, Betty is walking down some steps in a large jostling crowd of people leaving a football game. Betty accidentally trips and as she is falling collides with Frank, pushing him to the ground. She can claim unavoidable accident. [6.210] 277

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Necessity [6.220] In certain and limited situations, necessity may be a defence to an intentional tort. For example, a doctor performs emergency surgery on a patient, or I see my neighbour’s house on fire and trespass both on his land and the land of another neighbour in my efforts to put out the fire. In these situations the offender will be excused from liability where the situation was urgent and the action taken was a proper and reasonable response.

Statutory authority [6.230] Statutory authority is a good defence to an action for trespass. The defence will cover both the wrongful act and its necessary consequences. For example, an employee of an electricity supply authority can enter land without consent to read an electricity meter.

NEGLIGENCE [6.240] Negligence is designed to offer protection against any careless acts or omissions that could injure a person’s physical body or property, real property, or personal property. The essence of the tort of negligence is that the law imposes a duty on a person in certain situations. Negligence law was historically the domain of the courts imposing various common law principles and to a large extent many common law principles and rules still apply. However, since 2002 State Parliaments introduced Civil Liability Acts that both recognised many common law principles but also introduced new features and modified and limited some existing rules and their application. Negligence laws today comprise both common law and statute law that operate concurrently. The relevant Civil Liability Acts are detailed in [3.770]–[3.990]. The duty is to take reasonable care not to cause harm to others. Where that legal duty is broken the offending party is liable to compensate the injured person for any losses or damage caused by that breach of duty, provided the losses or damage were reasonably foreseeable. There is no exact legal formula for establishing whether a duty of care exists. Historically, the neighbour principle was first introduced by Lord Atkin in 1932 in the following case. After this case, the tort of negligence developed as a separate and distinct legal action. Case study [6.250] Donoghue v Stevenson [1932] AC 562 (Donoghue’s Case). The plaintiff and a female friend went to a Scottish café, where the friend purchased for the plaintiff a bottle of ginger beer. The plaintiff drank some of the beer and when the remainder was poured into a glass they noticed that it contained a decomposed snail. She claimed that as a result of consuming the contaminated drink and seeing the decomposed snail she suffered gastroenteritis and nervous 278 [6.220]

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shock. As she had not purchased the drink herself she had no contract with the café and she was unable to sue the owners for breach of contract. She brought action against the manufacturer of the ginger beer in negligence. The manufacturer argued that it was not liable as Ms Donoghue had no contract with the manufacturer either, because her friend had bought the drink. The House of Lords stated that there was no reason why parties to a contract should not be liable in negligence to persons outside the contract because the action was not being brought for breach of contract, but in negligence. The basic question that the court had to decide was whether the manufacturer owed a duty to Ms Donoghue to take reasonable care in the way in which it produced its ginger beer. The House of Lords held that the manufacturer did owe a duty of care to her and that it had been negligent. The court described the liability for negligence as based on the general public sentiment of moral wrongdoing for which the offender must pay. Lord Atkin categorised the duty of care in these words in this famous judgment (at 580): The rule that you are to love your neighbour becomes in law, you must not injure your neighbour; and the lawyer’s question, who is my neighbour, receives a restricted reply. You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour. Who, then, in law, is my neighbour? The answer seems to be – persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question. Foreseeability of harm to your “neighbour” became the basis of a duty of care owed to the neighbour. In other words, not all careless acts create liability; the defendant is only responsible for reasonably foreseeable damage. On the facts the manufacturer owed a duty of care to Ms Donoghue, as she was the consumer of its product and any reasonable manufacturer would foresee that a contaminated drink could harm anyone who drank it. The court considered that when a manufacturer puts an article of food in a container which they know will be opened by a consumer without possibility of reasonable preliminary inspection by either purchaser or consumer, and due to negligence during manufacture the article is poisoned, the manufacturer owes a duty of care. The court concluded that the law expected any manufacturer of products to exercise care in the preparation of products and that duty was owed to the ultimate consumer. The court stated that the ordinary needs of a civilised society would not deny a legal remedy where there was so obviously a social wrong.

[6.255] Since the House of Lords was satisfied that Ms Donoghue had a basis for her claim, based on the three to two majority of the judges in her favour (of which Lord Atkin’s judgement remains the best known) the case was listed for January 1933 for hearing of the factual allegations with a view to the award of damages. This requirement meant that Donoghue would have to prove the facts of her claims. That is, Donoghue would have to establish that there had in [6.255] 279

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fact been a snail in the bottle of ginger beer due to Stevenson’s poor manufacturing and bottling process. Further she would have to prove that the snail caused her illness. Unexpectedly, David Stevenson, the defendant, died in November 1932 and his executors settled the case out of court, paying Ms Donoghue £200 of the original £250 she claimed. Notwithstanding, the legal principles raised in the case have become a crucial part of the law of negligence. [6.270] Unlike other torts such as trespass or battery, which require specific actions, negligence is about careless behaviour. It can therefore involve any form of human activity or conduct. Lord MacMillan observed in Donoghue’s case that the categories of negligence were never closed. The requirements of reasonable foreseeability and proximity are normally required to create a duty of care. In new areas of careless behaviour these factors are necessary to establish a duty of care. However, where the facts of a particular negligence case are similar to previously decided cases it may be easier to establish a duty of care by following past decisions. Courts have recognised a duty of care in such situations as driving motor vehicles, supplying professional services, manufacturing products and supplying labour or services. In the event a negligent action arises in these types of recognised situation, a duty of care might be more readily accepted based on precedent. If a negligence action arises in a novel or totally original situation where the courts had little or no precedents to follow then the duty of care might be harder to prove and the plaintiff would need to establish both reasonable foreseeability and proximity to show a duty of care. Ideally, anyone who, by their careless actions, causes injury or damage to another should pay compensation. However, courts are reluctant to impose such a universal rule because it would be too costly to society. Therefore, not all careless conduct will result in a successful claim for negligence. To establish a claim for negligence the plaintiff must prove four essential elements: 1. The defendant owed the plaintiff a duty of care (ie a duty legally recognised). 2. The defendant breached that duty of care (ie failed to reach the required legal standard). 3. The plaintiff suffered damage because of that breach of duty (ie causal link of negligence to the damages/injury). 4. The damage or injury was not too remote (reasonably foreseeable).

What is a duty of care at common law? [6.280] The first essential element to establish is that the defendant owed to the plaintiff a legal duty of care. Where a plaintiff can bring the circumstances of their case within one of the recognised relationships that give rise to a duty of care then they are likely to succeed in proving it. 280 [6.270]

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Difficulties arise where a new situation requires a decision on negligence in a totally new area of human endeavour and the court must decide in the new circumstance whether a duty of care exits. Following Donoghue’s Case the rule to determine a duty of care was the concept of reasonable foreseeability of harm associated with the neighbour principle. The principles in Donoghue’s Case were recognised and followed by the High Court in a case involving dangerous woollen underwear sold by a retailer in plastic wrappings. Case study [6.290] In Grant v Australian Knitting Mills (1933) 50 CLR 387, Dr Grant purchased, from an Adelaide retail store called John Martin & Co Ltd, some long fleecy woollen underwear. The underwear was produced by Australian Knitting Mills Ltd (AKM). When he started to wear it he developed dermatitis which became very serious and he was hospitalised for over three months. Expert opinion was that a chemical (free sulphite) had not been removed from the wool in the manufacturing process and that this chemical had caused the dermatitis. Dr Grant sued the retailer for breach of contract under the Sale of Goods legislation, claiming that the goods were not fit for purpose and were not of merchantable quality. He also sued the manufacturer (AKM) in negligence claiming it had a duty to take reasonable care to ensure that its goods were safe or at least to warn customers where there was possible harm. The court stated the disease contracted, and the injuries suffered by Dr Grant, were caused by the defective condition of the underwear the shop had sold to him. The Chief Justice gave judgment against the shop for breach of the implied conditions and warranties under the Sale of Goods Act. The goods had not been fit for purpose nor of merchantable quality. Was the manufacturer liable in negligence? The court agreed that the underwear did contain sulphates and this was the cause of Dr Grant’s dermatitis. The manufacturer had made defective clothing and placed that defective clothing on the market where it was later purchased by Dr Grant. The court recognised it was essential that a duty of care be established in order to succeed in negligence. The judges followed the principles from Donoghue’s Case and declared that a manufacturer who sells products for use by consumers – where the products cannot be reasonably examined prior to use and the manufacturer knows that careless preparation may cause injury – owes a duty to the consumer to take reasonable care. The court held that the manufacturer owed a duty of care to Dr Grant to make sure that its products could be used by the consumer without danger. Although many packets of long woollen underwear had been sold and worn by customers without injury, the court followed the rules laid down in Donoghue’s Case and ordered the manufacturer to pay damages to Dr Grant. The court stated that even though Dr Grant was pursuing a claim against the retailer for breach of contract this did not affect his rights to claim against the manufactured for negligence as tort liability did not require proof of a contract. It required proof of a duty of care.

[6.290] 281

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How to find the duty of care [6.300] For many years the test for the existence of duty of care has been reasonable foreseeability. If the consequences were not reasonably foreseeable, then there was no duty. This test has not always proved effective to deal with modern developments. The High Court, in a series of cases, has applied the test of proximity. In San Sebastian Pty Ltd v Minister Administering the Environmental Planning and Assessment Act (NSW) (1986) 162 CLR 340, a majority of the High Court stated that the relationship of proximity was an integral constituent of the duty of care concept. The Court said that in its broader sense it provided a general limitation on the test of reasonable foreseeability. There are thus two aspects of the duty of care: • the risk must be shown to have been reasonably foreseeable; and • proximity between the plaintiff and defendant must be proved. Foreseeability in itself is not sufficient to establish proximity in novel (in the sense of “new” or “original”) areas of negligence. In Sutherland Shire Council v Heyman (1987) 157 CLR 424, Deane J said at 497-498 that proximity was the touchstone on which the common law would determine that a duty of care existed. Proximity could be physical, circumstantial or causal: [The concept of proximity] involves the notion of nearness or closeness and embraces physical proximity (in the sense of space and time) between the person or property of the plaintiff and the person or property of the defendant, circumstantial proximity such as an overriding relationship of employer and employee or of a professional man and his client and what may (perhaps loosely) be referred to as causal proximity in the sense of the closeness or directness of the causal connection or relationship between the particular act or course of conduct and the loss or injury sustained.

To this we might also add, particularly in situations where the loss is purely economic, the concept of reliance. Reasonable reliance is an important element for the existence of a duty of care.

Physical proximity [6.310] Suppose that Beavis is carelessly driving his car along a city street and collides with a cyclist. Here there is a sufficient proximity, or closeness in time and space, to found a duty of care.

Circumstantial proximity [6.320] Here the duty of care depends upon the nature of the relationship between the parties. For example, an employer has a duty to employees to provide safe working conditions and a professional adviser has a duty to the client to give correct/accurate advice.

Causal proximity [6.330] This operates where the link between the negligent act and the damage suffered is close enough to justify the finding of a duty of care. 282 [6.300]

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In Bryan v Maloney (1995) 182 CLR 609, a builder built a house for X. The house was built with defective materials. Some years later, after X sold the house to the plaintiff, cracks developed in the house because of the defective work causing a loss of value in the property. The plaintiff sued the builder. There was a relationship of proximity between the builder and the plaintiff (subsequent owner); as the builder had owed a duty of care to X and was negligent the court suggested that what the builder owed to X he also owed to the subsequent owner. This meant that the builder owed a duty of care not only to the original owner but also to subsequent owners. It appears the High Court based liability upon the fact that the building was a dwelling house usually intended to be permanently occupied or used and normally represented a substantial investment by any owner and the defective work caused economic losses. The court suggested that the relevant duty was very narrow and indicated its decision did not extend to defects in commercial buildings or defective products. It is interesting to note that the doctrine of proximity was rejected by the High Court about 6 years later in Sullivan v Moody (see [6.350]) and so Bryan’s case may now have little authority relating to the doctrine of proximity.

Res ipsa loquitur [6.340] A special method of proving negligence by the use of circumstantial evidence is the principle “res ipsa loquitur” which means “the thing speaks for itself”. In effect, the law is recognising that the mere occurrence of the event or accident (the thing) is proof of negligence. The principle has been commonly applied to motor vehicle accidents and creates the presumption of negligence on the part of the driver in circumstances where the exact cause of the accident is unknown. The High Court stated the essential elements of res ipsa loquitur (RIL) in Schellenberg v Tunnel Holdings (1999) 200 CLR 121, namely: • there must be an absence of explanation on how the injury or damage was caused; • the occurrence was of a kind that does not ordinarily occur without negligence; and • the defendant was in control of the instrument/agency that caused the injury/damage. A plea of RIL does not necessarily prove negligence. The effect of RIL is to place responsibility on the defendant to explain that the occurrence was not the result of careless conduct on their part. In effect, the defendant must show either that the accident occurred without their negligence or that they took all reasonable care. In Lafranchi v Transport Accident Commission (2006) 14 VR 359; [2006] VSCA 81, a car ran off the road and hit a power pole injuring the driver’s mother. On appeal the court agreed that RIL had not been established [6.340] 283

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because the driver had produced several expert witnesses who convinced the court that there were many possible non-negligent causes of the accident (such as a blackout). In Blackney v Clark [2013] NSWDC 144 the plaintiff sued for personal injury suffered whilst coming to the rescue of the defendant and his vessel which had overturned and left the defendant clinging to the bow. The defendant had called for assistance from his vessel near Evans Head, when he was in the midst of breaking waves. When the plaintiff’s vessel arrived, the plaintiff entered the water holding a rope and swam towards the defendant and unsuccessfully tried to attach the rope to the bow of the vessel. Due to the waves, the plaintiff was ultimately washed unconscious onto the beach and suffered injuries. The defendant denied liability claiming the plaintiff had voluntarily accepted the risk or had been negligent himself. He claimed the plaintiff’s recovery actions had been foolhardy. The judge stated that in order for the defendant to succeed he had to prove that the plaintiff’s conduct amounted to a wholly unreasonable disregard for his own safety. On the facts, the plaintiff was found not to have been misguided nor foolhardy and so was not guilty of contributory negligence. The defendant failed to give any evidence of what happened. It seemed obvious that the defendant had allowed his vessel to get so close to the breakers that it was dragged into shore. This alone meant the facts “spoke for themselves” (res ipsa loquitur). As such the District Court held the plaintiff was entitled to recover damages. Here the court affirmed that individuals who voluntarily place themselves in a position of peril owe a duty of care to their rescuers; and if they act negligently, they are liable for any loss or damage suffered as a result.

Reliance: is proximity always useful to decide a duty of care? [6.350] In some situations, particularly where the claim is only for economic loss, the relationship of proximity will depend upon whether there has been an assumption of responsibility by the defendant and a reliance by the plaintiff: see Rawlinson & Brown Pty Ltd v Witham [1995] Aust Tort Reports 62,403 (81-341). In recent cases, the High Court has cast doubts upon the use of proximity as a general test for the duty of care. In Hill v Van Erp (1997) 188 CLR 159, McHugh J (at 210) saw weaknesses in the concept of proximity and was sceptical as to whether it gave “any real guidance in determining the existence of a duty of care in difficult and novel cases”. This was particularly so in cases involving pure economic loss. Several other judges agreed that the principle of proximity was not applicable to all cases of alleged negligence. In Sullivan v Moody (2001) 207 CLR 562 under the Community Welfare Act 1972 (SA) medical practitioners and social workers and departmental officers were obliged to investigate, examine and report upon allegations of child sexual abuse. Following examinations, doctors reported that two fathers had engaged in sexual abuse of their children. Later charges were dropped when it was discovered mistakes had been made. The fathers claimed they suffered nervous 284 [6.350]

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shock, distress, psychiatric harm and financial losses as a result of the accusations and they sued for damages in negligence. They argued that the doctors and other workers had not exercised due care, skill and diligence in carrying out their responsibilities. The High Court pointed out a number of problems that were relevant to decide whether there was a duty of care, its nature and the scope of such a duty. These problems included: • the nature of the harm • the use of statutory powers (conflict with common law principles) • difficulty in showing proximity (ie how many people are owed a duty of care). As a result the court decided that a duty was not owed, stating that the Act required the doctors to treat the interests of the children as paramount. Their professional statutory responsibilities involved investigating and reporting upon, allegations that the children had suffered, and were under threat of, serious harm. It would be inconsistent with the proper and effective discharge of those responsibilities if they became subjected to a legal duty to take care to protect persons who were suspected of being the offenders. The over-riding consideration was the professional and statutory obligations of the defendants, which included treating the interests of the children as paramount. The High Court took the view that this statutory duty was irreconcilable with the alleged common law duty of care alleged to be owed to the defendants. The High Court stated this was the type of case where finding a duty of care would impair the proper application of the statutory responsibilities. Readers should remember that in many cases of alleged negligence, the duty of care in particular types of relationships has already been recognised by courts.

In what situations has a duty of care been commonly recognised? [6.360] A duty of care has been regularly identified in many relationships/ situations including: • by the driver of a vehicle to other users of the road, and to persons by the road or occupying property by the road; • by an employer to take reasonable care for the safety of employees; • by paid professional advisers to exercise reasonable care in the work that they do for clients; • by the occupiers of property towards people who enter onto the property and in respect of dangerous goods and activities; • by all persons engaged in the production, distribution and delivery of goods and services; and • by governmental and semi-governmental authorities. [6.360] 285

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These, and several other types of relationships, are discussed later in this chapter. It is only when a situation that is novel/new comes before a court, in the sense that the problem has not arisen before, that the courts then have to determine – taking into account reasonable foreseeability, proximity, reliance, policy and any other relevant factor – whether this is the type of relationship that should bear a duty of care and the extent of that relationship.

Nervous shock cases [6.370] The courts now recognise a liability for nervous shock. Formerly, there were only limited situations where damages could be awarded. The combined effect of recent cases indicates that the courts will now apply to cases of claim for nervous shock the same test as other cases of damage: reasonable foreseeability and proximity. In Jaensch v Coffey (1984) 155 CLR 549, a man was badly injured in a car accident. His wife suffered nervous shock as a result of being told about the accident and then seeing her husband in a badly injured condition in the hospital. The High Court held that she was entitled to recover damages for nervous shock. There was sufficient proximity to justify a finding that there was a duty of care. In Annetts v Australian Stations Pty Ltd (2002) 211 CLR 317, a station hand working on a large rural property died of thirst when he became lost and had no means of communication. His parents successfully sued their deceased son’s employer for damages for nervous shock and psychiatric illness caused by their long and stressful wait for him to be found. The High Court recognised their illness as being foreseeable. Legislation in some jurisdictions specifically provides for liability for nervous shock. For example, the Law Reform (Miscellaneous Provisions) Act 1944 (NSW) allows damages for nervous shock where a person is killed, injured or put in peril. The classes of person who can claim are the spouse or a parent of the victim, or any other relative where the accident took place in the relative’s sight or hearing.

Duty of care towards “abnormal” persons [6.380] The duty of care extends to abnormal persons where it is foreseeable that such persons will come within the class of persons exposed to the risk. The law uses the word abnormal in this sense to indicate a sensitivity that is outside the average range. In Haley v London Electricity Board [1965] AC 778, a blind man, walking along a London street, was injured when his white stick failed to detect an obstacle placed on the street by the defendant to ensure passers-by did not fall into an open trench. The court held that it was reasonably foreseeable that passers-by could include blind persons as well as persons with normal sight. This principle also operates with respect to people with allergies. In Levi v Colgate Palmolive (1941) 41 SR (NSW) 48, the court said there was a duty to 286 [6.370]

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exercise care toward “users who had a higher degree of sensitivity than normal so long as they were not altogether exceptional”. In Grant v Australian Knitting Mills (1933) 50 CLR 387, it was argued that the plaintiff had an unusual sensitivity to the chemicals in the garments as a large amount of customers had purchased the same clothing without suffering any physical injuries. The court still found the manufacturer liable in negligence for damages.

Proof of the duty of care [6.390] It is for the plaintiff to show, on the balance of probabilities, that there was a duty of care. This means the burden lies on the party bringing legal action to prove it. In Bourhill v Young [1943] AC 92, the plaintiff was not able to prove she was owed a duty of care. In that case a pregnant woman had alighted from a tram as a motorcyclist sped past on the other side of the tram and collided with a car. The rider was killed. The plaintiff heard the sound of the collision and later saw blood on the road. One month later her baby was stillborn and she claimed this had been caused by the shock of the accident. However, the court held that she was over 15 metres from the accident and standing on the other side of the tram and did not actually see the collision. She could not satisfy the court that the rider owed her a duty of care.

Standard of care [6.400] In order for there to be a breach of a duty of care there must be some standard of care (amount of care) that the law requires in the particular circumstances. The law basically requires that the defendant must act reasonably towards the plaintiff in the particular circumstances. The standard of care required by law is that expected from a reasonable person. Breach of the duty of care is therefore measured objectively; how would a reasonable person have acted in the defendant’s situation? In Wyong Shire Council v Shirt (1980) 146 CLR 40 the High Court said that to decide if a duty of care was broken the court must first ask whether a reasonable man in the defendant’s position would have foreseen that his conduct involved a risk of injury to the plaintiff. If so, what would a reasonable man do by way of response to the risk? The court must balance the size of the risk, and the likelihood of it occurring, against the expense and difficulty in removing it.

Foreseeability of harm [6.410] The problem of course is foreseeability. Is it sufficient that there was the possibility of risk or should the defendant have reacted only when the chances of something happening were great? The test, in practice, falls somewhere in between. It has been said that the risk must be such that a reasonable person would not “brush aside as far-fetched”. Deane J said in Hackshaw v Shaw (1984) 155 CLR 614 at 663 that: [6.410] 287

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The measure of discharge of the duty [of care] is what would a reasonable man, in the circumstances, do by way of response to the foreseeable risk.

In Bolton v Stone [1951] AC 850, a cricket ball was hit out of the ground and injured a passer-by. It was established that such a stroke was within the capacities of good batsmen and had occurred about a dozen times in the previous 30 years. The court held that the possibility of injury was so small that a reasonable person was justified in disregarding it. This case suggests that a person who knows of a risk and does nothing to remove it may still be acting in a reasonable manner. In some situations, industry practice, rules of the game and obviousness of risk may be relevant to the issue of breach of duty. In Haylen v New South Wales Rugby Union Ltd [2002] NSWSC 114, Peter Haylen, then aged 20, suffered serious injuries resulting in quadriplegia whilst participating in a rugby union match as a member of the Sydney University Football Club. He brought legal action in the Supreme Court for negligence claiming the defendant owed a duty of care to organise and regulate the playing of the game of rugby union so as not to expose him to unnecessary risk of injury. Due to the obvious risks in playing rugby the Court believed it was not possible for the Union to owe such a duty of care and it dismissed the claim.

Magnitude of harm is a matter to consider [6.420] Where the seriousness of harm to one party is greater than anyone else the standard of care may be greater. In Paris v Stepney Council [1951] AC 367, the plaintiff had only one eye and was employed by the defendant council as a fitter and turner. While he was hammering, a chip of metal flew up and hit him in his good eye and he became totally blind. He sued the council for negligence. The council was aware that a loss of one eye is much more serious to a one-eyed person than to a person with two good eyes. In this case a reasonable person would have weighed up the cost of supplying safety equipment against the potential consequences to the plaintiff and provided safety glasses or a helmet. The court held that the council was negligent in failing to supply safety helmets or goggles and ensuring workers used them properly.

Is inexperience /lack of knowledge an excuse? [6.430] A person involved in an activity requiring a special skill or knowledge must not only exercise reasonable care but will also be judged on the standards appropriate to that activity. In Cook v Cook (1986) 162 CLR 376 the High Court initially held that as between an unqualified and inexperienced driver and a front seat licensed driver who was instructing/supervising the driver and was aware of the driver’s inexperience/ lack of qualifications the standard of care was adjusted to account for a reasonable unqualified/inexperienced driver. However, in 2008 the High Court in Imbree v McNeilly (2008) 236 CLR 510; 288 [6.420]

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[2008] HCA 40 overruled its earlier decision in Cook v Cook (1986) 162 CLR 376 and stated that it should no longer be followed. In this case Imbree was a front seat passenger supervising a 16 year old unlicensed driver when the car crashed and he was badly injured. In proceedings to recover damages the High Court decided that the standard of care owed by the driver to the passenger was the same as any other person driving a motor vehicle – to take reasonable care to avoid injury to others, ie the standard of a “reasonable driver” and that standard was not to be further qualified by reference to either not holding a licence or by reference to the level of experience of the driver. Knowledge of inexperience did not provide sufficient reasons for applying a different standard of care. The court stated that the common law recognised there were many situations in which the standard of care expected of a person could be different depending on the circumstances eg professionals like medical practitioners or specialists with particular skills may have a higher standard of care. The essential requirement is that the standard of care is objective and impersonal ie based on a reasonable person. Negligence is designed to compensate a plaintiff for their actual losses. If the plaintiff cannot prove damage (ie loss or injury) then any action in negligence will fail. The plaintiff must also establish that the defendant’s negligence caused the damage, and that it was not too remote.

Causation (linking losses to the negligence) [6.440] It is not enough for the plaintiff to prove that there was a duty of care and that duty was breached by the defendant. The plaintiff must be able to prove that the defendant’s negligence caused the damage or loss. An example of the problem of causation can be shown in the case of Alexander v Cambridge Credit Corp Ltd (1987) 9 NSWLR 310. The defendants audited the balance sheet of the plaintiff company. They failed to make provision for certain bad debts and did not require an adjustment in the value of assets that had been overstated in the previous balance sheet. The balance sheet accordingly did not adequately reflect the company’s true financial position. The company borrowed money on the basis of its balance sheet. Following a general recession in land prices, the company subsequently defaulted on its borrowings and went into liquidation. The court held that the auditors had breached their duty of care to the company but were not liable for the company’s losses as these had been caused by a collapse in the property market and government policies rather than the auditors’ carelessness (no causation). The courts have developed a test to find whether a breach of duty was the cause of the damage or loss. This test is known as the “but for” test. The court asks the question, “Would the plaintiff have suffered the damage or injury but for the defendant’s negligence?” If the answer to that question is no, then the negligence of the defendant is taken to be the effective cause of the plaintiff’s damage. In the earlier cases of Donoghue v Stevenson [1932] AC 562 and Grant v [6.440] 289

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Australian Knitting Mills (1933) 50 CLR 387 you would probably agree that but for the careless production of the ginger beer, Ms Donoghue would not have contracted gastroenteritis and but for the careless manufacturing of the underwear, Dr Grant would not have suffered the dermatitis. In Perisher Blue Pty Limited v Nair-Smith [2015] NSWCA 90 (9 April 2015), NS was a skier injured by a ski chair lift when the operator delayed in raising the safety bar on the chair as it approached the skiers from behind. NS became out of alignment and was struck by the chair and badly injured. She sued Perisher for damages in negligence and breach of contract. The judge found Perisher had breached its duty of care. It was noted by the court that the plaintiff had the burden to prove that “but for” the inattention of the ski operator she would not have moved out of alignment and been injured. She was awarded $1,360,000 which was overturned on appeal. The NSW Court of Appeal agreed that there had been a failure to exercise reasonable care by the lift operator. His failure to do so, according to the Court of Appeal, meant the lift company breached its duty of care. So, why did NS lose? The sole reason was that, despite this the Court of Appeal was not prepared to accept that the “situation” with all the confusion was enough to cause the injuries. It sought more precision between “cause” and “effect”, ie causation. They noted that there could have been any number of reasons why NS was out of alignment with the chair and these could include simply her skis slipping or lack of attention on her part. The original judge had erred in finding the negligence caused the harm for which the plaintiff sought damages. The court therefore found that the primary judge was correct to have found that Perisher breached its duty of care owed to NS. However, it concluded the trial judge should have found that the negligence of the appellant was not causative of the injury suffered by NS. The court stated: “that the damages claim should have been dismissed (this case was also relevant in relation to liability under s 51 of the Civil Liability Act 2002 (NSW)”.

Limits to the “but for” test [6.450] However, the test is not perfect and problems can arise where there may be more than one cause of the plaintiff’s damage or injury. An interesting example on the limits of the test can be seen in the case of Yates v Jones [1990] Aust Torts Reports 67,632 (81-009) where the plaintiff was injured as a result of a motor vehicle accident caused by the negligent driving of the defendant. As a result of the accident the plaintiff was hospitalised and while in hospital she was given heroin by a male friend to ease her pain. The plaintiff subsequently became a heroin addict and she sued the defendant for damages not only for her injuries but also for her addiction claiming that but for the negligent driving she would not be addicted. The court rejected her argument and recognised that the heroin addiction was the result of a third party offering the heroin to the plaintiff and this was an independent cause of her addiction and 290 [6.450]

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not the negligence. See also Yu Mei Chu v State Rail Authority [2007] NSWDC 41 in [6.820] where the court refused to recognise negligence because of the intervention of a third party. The “but for” test is not the only test that is used in determining causation and it seems that the courts may be tending towards a “commonsense” approach. In March v E & M H Stramare Pty Ltd (1991) 171 CLR 506, the High Court held that the but for test remains the primary test although the courts may use other tests in other situations to determine causation. Deane J said that as a matter of ordinary common sense the courts could conclude that an identified act of negligence was so closely connected to the plaintiff’s loss or injury that it should be regarded as the cause of it. See also the limits on the “but for” test in such cases as Bennett v Minister of Community Welfare (1992) 176 CLR 408, Tabet v Gett (2010) 240 CLR 537 and Amaca Pty Ltd v Booth (2011) 246 CLR 361. More recently in Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd (2013) 247 CLR 613 the High Court’s opinion was that although the “but for” test was useful, it had a limited function and a more common sense approach was to be favoured.

Remoteness of damage: losses must be foreseeable [6.460] In addition to causation there is a further limitation on the ability of the plaintiff to recover damages from the defendant. The defendant may not be liable for every loss caused by their negligence. The law limits the liability of the defendant to pay damages only for loss or injury that is not too remote. The test used to determine the limits of liability is reasonable foreseeability. If the injury or loss to the plaintiff was reasonably foreseeable then the defendant is liable to pay for that injury or loss. The issue is not whether the defendant could personally foresee the injury or loss to the plaintiff. If that was the case then every defendant would have an easy defence by claiming they did not expect the plaintiff to be injured or suffer loss. The test to be applied is an objective test: Would a reasonable person in the defendant’s position and in the circumstances of the case have foreseen that the careless action would result in the injury or loss to the plaintiff? Case study [6.470] This principle was established in an Australian case called Overseas Tankship (UK) Ltd v Morts Dock Engineering Co Ltd [1961] AC 388 (commonly referred to as the Wagon Mound No 1 Case after the name of the tanker used by the defendants). The plaintiffs were the owners of a wharf in Sydney Harbour. The defendants had chartered a ship named Wagon Mound and it was moored in the harbour. The defendant negligently discharged a quantity of furnace oil into the harbour and the Wagon Mound then left the area. The oil drifted with the tide on the surface of the water for a distance of 200 metres. The plaintiff company was operating a dockyard at a wharf nearby where it carried out

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repairs to vessels using arc welding equipment. Work was temporarily stopped so that the company could decide if it was safe to continue refitting work on a ship moored at the wharf. It was decided that furnace oil could not be ignited whilst spread on water and so work continued at the wharf. Unfortunately, after about 50 hours work molten metal from arc welders fell through gaps in the wharf and landed on cotton waste floating on the oil and set fire to the oil, which resulted in the wharf and the ship being badly damaged. The plaintiff company sued the defendants in negligence for the fire damage to the wharf. At this time case law suggested that a plaintiff could recover all losses that were directly caused by the negligence. However, the Privy Council declared that a defendant was not liable for all losses. The court stated that a defendant is liable only for losses that should have been foreseen by a reasonable person. The court acknowledged that the plaintiff company itself had believed that the discharged liquid could not catch fire on the water. The plaintiff was reluctant to admit the lack of foreseeable harm but both parties did acknowledge that neither believed a fire was possible ie its likelihood was nil. (Considerable argument was made as to the flammability of the type of oil spilled, that is, engine oil. The ignition point of this type of oil was not high.) As a result the court held that the defendants were not liable for the fire damage to the wharf because the damage was too remote. The court decided that the discharge of oil into the harbour could not have been reasonably foreseen to cause fire damage to the wharf, which was located some distance away from the ship.

[6.480] It is interesting to note that following this case there was another claim in negligence against the same defendants arising from the same fire. The owner of the ship that had been moored at the wharf and damaged in the fire sued for damages. In Overseas Tankship (UK) Ltd v Miller Steamship Co Pty Ltd [1967] 1 AC 617 (PC) (The Wagon Mound (No 2)), the owner of one of the ships damaged in the same fire brought legal action against the defendant charterers of the Wagon Mound. Using somewhat different evidence the plaintiff satisfied the trial judge that the officers aboard the Wagon Mound had reason to believe that the oil was very difficult (but not impossible) to catch fire. The Privy Council asked the question, “Once the risk was at all foreseeable how great did the odds have to be for a fire to occur?” The Court concluded (at 643) that it was sufficient that there was a “real risk, one which would occur to the mind of a reasonable man in the defendant’s position and which he would not brush aside as far-fetched”. The Court held the defendant liable for the fire damage to the ship. How can there be similar cases involving the same careless conduct that result in two different decisions? The two cases illustrate the general principle that each case is decided on its own facts and from the evidence presented by the plaintiff in the individual case. The plaintiff in the second case had the benefit of the first case and no 292 [6.480]

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doubt the plaintiff would have closely examined the decision of the Privy Council in Wagon Mound No 1 to assist them in preparing their evidence. Notwithstanding the rules as to remoteness of damage, it remains a basic principle that the defendant must “take his victim as he finds him”. This is sometimes called the eggshell rule from the following example. Adolf assaults Hermann, who has a very thin skull, an “eggshell” skull. The resulting injuries to Hermann are much greater than they would have been if his skull had been normal. Adolf must still pay compensation for the damage suffered.

Liability for “pure economic loss” [6.490] Until recently the courts have distinguished between liability for economic loss arising from damage to property or injury to a person and what is called pure economic loss. Courts have attempted to impose limits on liability where the damage suffered is economic loss only and has not arisen through injury or damage to property. Courts wanted to avoid situations where there was unlimited liability ie liability for unlimited amounts for unlimited times and for an unlimited number of plaintiffs. An important Australian case in the area of economic loss was Caltex Oil (Aust) Pty Ltd v The Dredge “Willemstad” (1976) 136 CLR 529. The High Court stated that liability for financial loss should be limited to those cases where the defendant could reasonably foresee that the particular plaintiff (as a specific individual) would suffer financial loss as a result of the careless actions. One way in which courts limit this liability for economic loss is by the requiring that the damage be reasonably foreseeable as discussed above. Another method is the requirement of proximity. As Deane J said in Sutherland Shire Council v Heyman (1987) 157 CLR 424 (see [6.300]), the distinction between mere economic loss and ordinary physical loss or injury remains important. Liability for pure economic loss is a comparatively new and developing area of the law of negligence. Reasonable foreseeability of a real risk of such loss does not of itself create a duty to take reasonable care to avoid it. There must also be required proximity of relationship. In Perre v Apand Pty Ltd (1999) 198 CLR 180, the High Court had to decide whether a claim for negligence could be made where the defendant’s careless conduct resulted in purely economic loss and not injury to a person or their property. The court held the defendant was liable in negligence. The Court said that where a person knows or ought to know that his or her acts may cause loss to an individual or a certain class (group) of people who cannot protect themselves, the law imposes a duty to take reasonable care to avoid economic loss. If this duty of care is broken pure economic losses may be recovered. The cautious approach to awarding damages for pure economic losses continued in the Victorian Supreme Court. In Johnson Tiles Pty Ltd v Esso Australia Pty Ltd [2003] Aust Torts Reports 81-692; [2003] VSC 27 the court stated that corrective justice demanded that anyone who suffered as a result of [6.490] 293

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the negligent conduct of another should be compensated by the wrongdoer. Further, the awarding of damages would be a timely reminder to be careful in the future. However, the court noted that not all complaints were awarded damages. The judge stated (at [1347]) that while the inconsistency may have appeared strange and lacking in logic, the common law of negligence had not developed uniformly and the law relating to negligence causing economic loss had developed slowly and cautiously. Categories where pure economic loss is more likely to occur include: • negligent misstatement/misinformation/misrepresentations; • professional undertakings; and • defective structures.

Negligent misstatement/ misinformation/ misrepresentations [6.500] Where a plaintiff has a contract with a defendant involving the supply of advice or information and that advice or information is carelessly given, then the plaintiff could base a claim for damages on a breach of contract and also negligence. Originally, unless there was some contractual relationship between the plaintiff and defendant, there was no legal right to recover damages for economic losses caused by the defendant carelessly giving words, advice or information. In Derry v Peek (1889) 14 App Cas 337, it was held that in the absence of a contract, there could be no action for negligent statements unless there was fraud. The law certainly excluded liability for negligent statements causing pure economic loss unless based on contract. It is now recognised that a duty of care may exist in respect of negligent statements even where there is no contract between the parties and even where those careless statements cause pure economic loss rather than physical injury or damage to property. The change in the law came about in the case of Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. Hedley Byrne, an advertising agency, was approached by Easipower Ltd to have the agency engage in an advertising campaign on its behalf which would involve substantial costs. The agency was to be personally liable to the television and newspapers for the costs of any advertisements placed on behalf of clients. The agency accordingly asked its bankers to obtain a credit report from Heller & Partners, which was the merchant bank for Easipower. The merchant bank subsequently supplied a favourable report about the company in the form of a letter that contained the heading “without responsibility on the part of this bank or its officials”. In reliance on this written report the agency placed advertising orders. Easipower failed and as a result the agency had to pay the accounts and suffered financial losses. The written report by the merchant bank had been inaccurate because 294 [6.500]

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Easipower had not been in a strong financial position. The agency sued the merchant bank for damages and based its claim in negligent misstatement. Lord Pearce advised that courts should exercise caution with respect to liability for words noting the greater potential of negligent words to cause harm. At 534 he stated: Negligence in words creates problems different from those in negligence in act … Yet they are dangerous and can cause vast financial damage … How far they are relied on unchecked … must in many cases be a matter of doubt and difficulty … if the mere hearing or reading of words were held to create proximity, there might be no limit to the persons to whom the speaker or writer could be liable …

The court expressed the view that a negligent statement whether written or spoken may give rise to an action for damages for financial losses even though there was no contract between the parties. The court emphasised the need for the existence of some special relationship between the plaintiff and defendant for a duty of care to arise. The court stated that where someone with special skill or knowledge undertakes to apply that skill for the assistance of another person who relies upon that skill, a duty of care may arise. The fact that the skilled person is merely supplying words makes no difference. The court held that in this case, the merchant bank was not liable because there was an express written disclaimer of responsibility in the written report. The decision in Hedley Byrne’s Case was taken to establish conclusively that in certain special situations a duty of care may arise in relation to negligent misstatements causing pure economic/financial loss. The principle was extended further by the High Court in Mutual Life & Citizens’ Assurance Co Ltd v Evatt (1968) 122 CLR 556 (Evatt’s Case). MLC and HG Palmer were subsidiaries of MLC Assurance Co Ltd. This meant that all of the shares of those two companies were owned by MLC Assurance Co Ltd. Evatt held an insurance policy with MLC Assurance and was considering investing in HG Palmer. Evatt sought advice from MLC Assurance Co Ltd about whether Palmer was in a good financial position. Evatt was informed that HG Palmer would continue to be financially stable and was a safe investment. Evatt relied on this advice and invested in HG Palmer, which failed soon after. Evatt lost his investment and sued both MLC Assurance Co Ltd and MLC Assurance for negligent misstatement. The High Court held that the company was negligent. It was reasonable for Evatt to rely on the information supplied to him by the defendant and the defendant should have reasonably foreseen that Evatt would rely on the information. The Court agreed the defendant owed Evatt a duty of care and this duty extended not only to professional advisers but to anyone who gave advice in “serious circumstances”. This High Court decision was subsequently reversed by the Privy Council on appeal. However, in a later case the High Court reaffirmed its decision.

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Case study [6.510] In Shaddock & Associates Pty Ltd v Parramatta City Council (1981) 150 CLR 225, Shaddock & Associates, a property developer, proposed to purchase land in the Parramatta area to develop. They instructed solicitors to act for them in this transaction. The solicitors firstly telephoned Parramatta City Council to find out whether the land was affected by road-widening proposals. The council’s employee informed the solicitors verbally that the land in question was not affected by any road-widening proposals. Later the council issued a written certificate in relation to the land incorrectly showing it was not subject to road widening. In fact the council’s replies to previous inquiries about the same property had disclosed the road-widening proposals. In reliance on council’s information, the plaintiff purchased the land and then suffered substantial damage when the land could not be fully developed, because part of it was required for road-widening. The plaintiff sued the council for damages caused by its negligent misstatements. The High Court held that the council was liable for the damage suffered. In this case, the plaintiff had sought factual information rather than expert advice but it made no difference. The High Court held that liability for careless statements was not limited to persons whose business or profession included supplying advice or information. The duty of care extended to any person supplying information or advice to persons in such circumstances where he or she would reasonably expect the information to be relied upon, ie giving considered advice or information on a serious occasion concerning a matter of business or some commercial transaction. In this case, the council had certain information about land in the area and this information was within the exclusive knowledge of the council and its employees. The information was important to those asking for it. In these circumstances, the council owed a duty to take reasonable care to make sure that the information supplied was correct and accurate. There was a breach of that duty when the council supplied the certificate without mentioning the road-widening scheme. The council was ordered to pay damages of $173,938 to the plaintiff for its economic losses. This amount represented $133,000 (the difference between the price paid and the actual value of the land), $18,745 for expenses such as taxes, council rates and insurances and $22,193 in interest.

[6.520] A point of interest in some of the cases on negligent misstatement is the fact that the defendant did not receive any payment for the information or advice and this fact did not affect the decisions. Following the High Court decisions in Evatt and Shaddock, it seems that the following principles apply concerning negligent misstatements. Where a defendant gives advice, an opinion or information to the plaintiff in circumstances where that plaintiff reasonably relies on the advice, opinion or information, then the defendant will be liable for any loss or damage suffered by that plaintiff if it is given carelessly. In determining reasonable reliance on the information the court will consider the following factors: 296 [6.510]

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• Did the defendant have a special skill or knowledge or purport to have that skill or knowledge? • Was the subject matter of the advice, opinion or information seriously given and in serious circumstances? • Did the plaintiff reasonably rely upon the advice, opinion or information? • Did the plaintiff suffer financial losses as a result of relying on the advice, opinion or information? • Should the defendant have reasonably foreseen that the plaintiff would rely upon his or her advice, opinion or information? • Did the defendant issue a disclaimer that effectively excluded his or her liability for the advice, opinion or information supplied? It should be noted from these principles that “reliance” is the key element in establishing a connection between the losses and the negligent statements that were made by the defendant.

Limits to liability for negligent misstatements/misinformation [6.530] The consequences of such a principle are very broad and the courts have attempted to limit its extension. In San Sebastian Pty Ltd v Minister Administering the Environmental Planning and Assessment Act 1979 (NSW) (1986) 162 CLR 340, a plan for the redevelopment of an inner-city region was publicly exhibited by the State Planning Authority and the Sydney City Council with the apparent intention of attracting developers to the area. The plan encouraged private developers to purchase land sites and construct highdensity office blocks. The plaintiff was a land developer and purchased property in the area on the basis of the expected development. Approximately four years after the public exhibition of the plans, the defendant withdrew the plans after discovering it was too difficult to upgrade transport facilities to service the expected increase in the workforce. The area was largely given over to residential use. The developer sold its land and suffered substantial losses. It commenced an action against the planning authority and the Sydney City Council for negligent misstatement. The High Court stated clearly that a claim for negligent misstatement is founded upon the duty of care arising from the ordinary principles of proximity and foreseeability. There was no representation/promise made by the Council that the land would be rezoned. The plans exhibited were only a statement of intention that could be altered before implementation. In AWA v Daniels (1992) 10 ACLC 933, the electrical business AWA lost a large amount of money in its foreign exchange operations after its foreign exchange manager had negotiated loans to conceal his incompetent management. AWA sued its auditors for negligence alleging they failed to properly conduct an audit and bring the full extent of the foreign manager’s operations to the notice of the company. The court agreed that the auditors were negligent as they breached their duty of care by failing to disclose to their [6.530] 297

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client company the improper accounting records, incorrect procedures and internal control problems and not reporting their concerns to the board of directors. However, the court accepted the auditors’ claim that the company’s senior management were also negligent in regard to the company’s internal management and controls. It found both the auditors’ and some directors liable in negligence. The case confirmed that a company could bring legal action against its directors for negligence for failing to take reasonable care in carrying out their job as directors. In [6.440], Alexander v Cambridge Credit Corp Ltd (1987) 9 NSWLR 310 showed that a defendant may avoid liability for negligence by proving the loss/damage was caused by other factors (apart from any negligence). This principle was supported in the later case of Leda Pty Ltd v Weerden [2006] NSWSC 125. Leda proposed to purchase a Trust that constructed and managed a hotel on land at Surfers Paradise. The Trust generated tax losses of over $38 million. A partner in a large accounting firm was requested to supply a written opinion on various tax deductions against income Leda was deriving from other property. The accountant provided a letter which detailed the losses available to be carried forward to offset against the Trust’s future assessable income but the letter contained no disclaimer warning Leda of the need for a “due diligence review”. When the purchase was completed the Australian Taxation Office rejected Leda’s claims for losses of over $2 million and issued amended Notices of Assessment. Leda commenced legal action against the accountants alleging their letter amounted to negligent advice. The NSW Supreme Court found that accountant had not exercised the degree of care and skill required of a competent accountant. However, Leda was seen as a “sophisticated taxpayer” that had made extensive inquiries into the tax possibilities and was fully aware of the risk that the Australian Taxation Office might reject their claims. Their risk was high having regard to the huge discount being claimed by the company. The accountant’s letter of advice had no effect on Leda’s decision to make the purchase. The deficiencies in the accountant’s advice did not materially contribute to Leda’s losses and so the company was not entitled to damages. There is uncertainty in the law about imposing a duty of care when supplying negligent misstatements. A paramount requirement to establish a duty of care is a reasonable appreciation of the purpose for which the information is to be relied upon. In Tepko PtyLtd v Water Board [2001] HCA 19 a majority of the High Court affirmed that the Water Board did not owe a duty of care to a developer to state accurately the likely cost of the provision of water to a planned subdivision. In this case T proposed to rezone and subdivide land. T obtained approval from both Penrith and Liverpool Councils, subject to the Board’s agreement to supply water to the land. The Board subsequently agreed to provide the water to the land, subject to T paying all connection costs. To comply with the requirements of its financier, T requested the Board to provide a cost estimate 298 [6.530]

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for the water connection. The Board refused the request as it was against its policy. However, an immediate cost for the connection was later included in a document supplied to the Minister for Natural Resources and passed on to T. The figure was incorrectly overstated, and as a result T’s financier exercised its power of sale over the land as they had been advised by T that the connection costs would be much less. T bought an action for negligence against the Board. At the original trial and on appeal the courts found that the original incorrect estimate given by the Board was negligent but they found the Board did not owe a duty of care to T. All judges agreed that the relevant principles from MLC v Evatt (see [6.500]) applied here and that the law would impose a duty of care in relation to negligent statements • where the speaker realises the recipient intends to act on the information in connection with some serious business/consequences; • where in all the circumstances, it would be reasonable for the recipient to seek out, accept and rely upon the statements. The court stated that no duty should be imposed on a party who had no appreciation of the implications of making an error in its statements. T had not informed the Board of the “critical state” of its relationship with its financier until it was too late. The Board was not obliged to give cost estimates and in fact its practice was not to give them. It found that the Board’s knowledge of T’s financial position was limited, and it was clearly only providing an immediate cost estimate. The Board could not be expected to know that T intended to act upon that costs estimate for a serious purpose. The circumstances were not such as to make it reasonable for T to solely rely on the estimated figures. T also had access to its own experts. In all the circumstances it was unreasonable to impose a duty on the Board.

Can outsiders claim for negligent misrepresentation/ misinformation? [6.540] Most of the cases discussed above involved supplying information/ advice to an intended/known party (usually the client/customer). In regard to negligent misstatements/misinformation being supplied to others, is there a duty of care owed to parties who might be either unknown to the supplier or being a party who was not expected to receive the advice/information? In some professional work or undertaking, is there the possibility of liability to parties outside the relationship? Suppose an accountant negligently prepares a company balance sheet. Would the class of potential plaintiffs extend beyond the company itself? Could lenders to the company, purchasers of shares in the company and suppliers to the company have rights against the directors or auditors? In other words: How wide is the class of potential plaintiffs? In Caparo Industries v Dickman [1990] 1 All ER 568, the respondents owned shares in a public company and were interested in a takeover of the company. They received audited accounts showing the company was profitable and they then made a successful takeover bid for the company. It was then discovered [6.540] 299

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the audited accounts were incorrect and showed a profit when in reality there had been a loss. The respondent sued the auditors alleging the accounts had been audited negligently and that the auditors owed them a duty of care. It was recognised that the accounts were put into more or less general circulation and it might be foreseeable that it would be relied upon by a variety of people for various reasons but this did not create any proximity of relationship between the auditors and the parties relying on the accounts. The judges recognised that there had to be several control mechanisms (not simply foreseeability of damage) in order to avoid unlimited liability for those who made confidential reports. The court decided that the auditors did not owe a duty of care to members of the public who might rely on the audited accounts because there was no proximity between the parties. In Esanda Finance Corporation v Peat Marwick Hungerfords (1997) 71 ALJR 448, Esanda made various loans and negotiated financial transactions with Excel Financial Corporation Ltd. Shortly after the loans were finalised Excel went into liquidation and Esanda lost a substantial amount of money. It claimed it had relied on the audited financial statements of Excel in granting the loans and that the auditors, Peat Marwick Hungerfords (PMH), had been negligent in auditing the accounts for Excel. The accounts failed to disclose the true and correct financial position of Excel. It was claimed PMH owed Esanda a duty of care because it was reasonable to foresee that other parties might rely on the accounts when deciding to supply finance to Excel. On appeal, the High Court of Australia held that there was no duty of care owed by PMH to Esanda in this case. The only intention of PMH was to perform its statutory duties and contractual obligations in completing an audit for Excel. It may have been possible for PMH to reasonably foresee that others in the market (such as Esanda) might rely on the published audited accounts but in reality, PMH had not specifically supplied the report for Esanda or any other outside party; nor had they any definite knowledge that Esanda would use it. As a result, Esanda was seen as being an unknown or unintended user. The judges recognised that mere foreseeability that someone might rely on the information was not enough to establish a relationship of proximity necessary for a duty of care for negligent misstatement. To succeed, the court suggested Esanda would need to prove PMH knew the information would be communicated to them and relied upon for serious business purposes. On the facts PMH did not have any knowledge of any specific party who might use the published reports in any specific transactions. From these cases, the current Australian position on negligent misstatement/ misinformation/misrepresentation seems to be that the courts are reluctant to recognise a duty of care by anyone supplying advice/information to an unintended or unknown user. There is normally not enough proximity between the supplier of the advice/information and the receiver to raise a duty of care. In addition to the common law, the Trade Practices Act 1974 (Cth) (TPA) until 2010 and the current Australian Consumer Law (ACL) apply to statements, 300 [6.540]

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information or advice made or supplied by professional persons. Several sections are important in respect of the supplying of professional advice or information: • in s 52 (of the former TPA) there is a prohibition upon misleading or deceptive conduct in trade or commerce: see Topic 5; • in s 18 of the ACL there is an identical prohibition on any misleading or deceptive conduct in trade or commerce committed after 2011 (in the Australian Consumer Law) see Topic 5; • in s 74 of the TPA there was a warranty implied in contracts involving the supply of services to consumers that the services shall be rendered with due skill and care (the former Trade Practices Act 1974); and • ss 54–62 of the Australian Consumer Law impose into consumer contacts (for the supply of goods and services) consumer guarantees which may not be excluded relating to quality and fitness for purpose of what is supplied under that contract.

Liability to clients for other professional work/undertakings [6.550] Any professional person who takes on work has a contractual duty to perform the work with reasonable skill and care. A professional person who fails to do so could be not only liable for breach of contract but may also be liable in the tort of negligence. There is a duty of care arising from their relationship of a professional person to the client. In Walmsley v Cossentino [2001] NSWCA 403, the plaintiff was injured in a motor vehicle accident in 1980 and instructed his solicitor in 1981 to start legal action for damages. The Limitation Act 1969 (NSW) provided that legal action must be commenced within six years from the date on which the cause of action first arose. No legal proceedings were commenced and the limitation period of six years expired in 1986. The Court of Appeal agreed that the solicitor had been careless in failing to bring legal action for the motor accident within six years. There can also be a duty of care to persons other than the client for economic loss caused by a professional person’s failure to act with reasonable care. In Hawkins v Clayton (1988) 166 CLR 539, X instructed her solicitor to prepare a will for her in which she named the plaintiff as executor and beneficiary. After signing the will, X left it with her solicitor for safekeeping. After X died, a fact known to the solicitor, the solicitor failed to contact the plaintiff for six years. During this time, the main asset left by X, her house, deteriorated and its value fell. The plaintiff sued for damages. The court held that the solicitor owed a duty of care to the plaintiff, as executor, to inform the executor of X’s death. It did not, however, determine what duty is owed, if any, by a solicitor to a beneficiary who is not also a client of that solicitor. The decision of the Queensland Court of Appeal in Van Erp v Hill (t/a R F Hill & Associates) [1995] Aust Torts Reports 62,051 (81-317) supports the view [6.550] 301

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that there is such a duty. In that case, a solicitor prepared a will for a client. Under the will, the plaintiff was a beneficiary entitled to a share of the estate. The client’s signature was witnessed by the solicitor and the husband of the plaintiff. As a result the plaintiff was not entitled to a share of the deceased’s property because the will had been witnessed by her husband. The plaintiff sued the solicitor. The court held that the solicitor owed a duty of care to the beneficiary.

Liability for defective structures: do builders owe a duty of care to subsequent owners? [6.560] A builder who negligently builds a structure for a landowner is liable for any damage caused by the negligence. The liability may arise both in contract and in tort. For example, Pietro builds a house for Giorgio and the brickwork is unstable. As a result, the house collapses. Giorgio can sue Pietro for breach of a contractual promise to build a safe structure and for negligence. If Giorgio is injured by the collapse of the house, the builder must also pay damages in relation to those injuries. If, however, Giorgio had subsequently sold the house to Luigi, and the house had collapsed, Luigi would have no action against Pietro for breach of contract because there was no contractual relationship between them. Luigi might, however, have the same rights as Giorgio to sue Pietro in negligence where a duty of care can be established under the principles of negligence. What if the damage is purely economic: ie the house develops cracks in it that do not threaten the stability but will cost money to fix? This happened in Bryan v Maloney (1995) 182 CLR 609: see [6.330]. The High Court held that in such a situation both the original owner and any subsequent owners would have the right to claim against the builder for the cost of the repairs. There was sufficient causal proximity to sustain such an action. In a later similar case of Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 315; [2004] HCA 16, consulting engineers designed and supervised the construction of foundations for a commercial building in Townsville for the trustee of a property trust. The engineers suggested investigating the subsoil conditions under the proposed new building but the trustee refused to pay for any quotes and the construction continued without these reports. About five years after completion the trustee sold the building to Woolcock. Within two years of purchase, substantial structural problems appeared, caused by settlement of the building’s foundations. Woolcock sued the engineers for the costs of rectifying the defects. The High Court decided that CDG did not owe the original owner (the trustee) a duty of care to avoid economic loss due to structural defects because the trustee had refused to pay for the necessary subsoil investigations and reports. As Woolcock was unable to show CDG owed the original owner a duty of care then they did not owe Woolcock such a duty of care either. 302 [6.560]

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There have been recent changes to the Home Building Act 1989 (NSW). The legislation requires builders and tradespeople to be licensed for work and have proper contracts and insurances in place for most job and imposes various statutory warranties about building work. New home building laws started on 15th January 2015 and further amendments commenced on 1st March 2015. Details about these changes and the role of the NSW Fair Trading Office may be accessed on the NSW Fair Trading website at http://www.nsw.gov.au. The High Court has made a recent decision in Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36 regarding when a builder owes a duty of care to subsequent owners of buildings. Here there had been a long running dispute between a building company BM and the owners corporation about building defects in the common property. BM had entered into a contract with a developer to construct a block of units that were to be operated as a serviced apartments business under the name Mantra Chatswood Hotel. The High Court stated that the building contract contained many strict clauses holding BM accountable to the developer for building defects and in the circumstances it was not appropriate to impose a supplementary duty of care ie no duty of care by B to the developer in tort. When the plan was registered the owners corporation was brought into existence (strata scheme) as the legal owners of the common property. The court held the owners corporation did not exist at the time the defective work was carried out and so the owners corporation could not have relied upon BM’s obligations under the contract. In addition the owners corporation did not suffer any losses as it acquired the common property without any outlay. As there was no duty of care owned to the developer, BM did not owe a duty to the owners corporation in these circumstances. In this case the High Court adopted a case-by-case approach as specified in the earlier cases of Bryan v Maloney and Woolcock Street Investments v CDG Pty Ltd.

OTHER SITUATIONS WHERE NEGLIGENCE RECOGNISED [6.570] In addition to the liability situations discussed above there are a variety of circumstances where the common law has recognised a duty to be careful. These include: • liability of occupiers of premises; • liability for the conduct of others (vicarious liability); • liability of public authorities; • liability for defective products; • liability for dangerous activities and criminal behaviour (non-delegable); and • liability of bailees.

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Liability of occupiers of premises [6.580] An occupier is the owner, lessee or party exercising control over premises. The common law has recognised that occupiers owe a duty of care to entrants in respect of dangerous premises or activities because of their control over the premises. Entrants may include guests, usual entrants, and even uninvited persons such as trespassers. In several cases dealing with the liability of occupiers, the High Court applied the general principle of the law of negligence relying on reasonable foreseeability and proximity. Case study [6.590] In Hackshaw v Shaw (1984) 155 CLR 614, the defendant farmer had suffered frequent robberies from his farm. The plaintiff and her friend had been trespassing on the farm in order to steal petrol. One night the farmer waited with a rifle and the plaintiff and her friend arrived in a car. The farmer fired a shot at the car engine trying to disable it. Unknown to the farmer, the plaintiff was hiding on the front seat of the car and was not visible from outside the car. The bullet struck the plaintiff through the car door and injured her. She sued the farmer for damages in negligence. The High Court held that all that was necessary was to determine whether the defendant owed a duty of care under the ordinary principles of negligence to the plaintiff. There had to be the necessary degree of proximity of relationship. There was a reasonable foreseeability of a real risk of injury to the visitor. The measure of the discharge of the duty is what a reasonable man would, in the circumstances, do by way of response to the foreseeable risk. The Court held that the farmer was liable, as he had deliberately fired shots in the direction of the plaintiff. The Court recognised that the farmer owed a duty of care to the plaintiff even though she was a trespasser. The farmer should have reasonably foreseen that firing a rifle in the darkness towards a motor vehicle might injure someone. The Court concluded the farmer’s conduct was not merely dangerous but ultra-hazardous.

Case study [6.600] In Australian Safeway Stores Pty Ltd v Zaluzna (1987) 162 CLR 479, a shopper was injured on a rainy Saturday when she slipped on the wet supermarket floor. Various customers had entered the store from outside making the floor wet. The store had not maintained a system to examine the floor regularly to ensure that it was kept dry. She sued the store for damages. The High Court held that the store was liable in negligence. The Court stated that negligence should be decided by the general principles of reasonable foreseeability and proximity. The occupier must take reasonable care in the circumstances but “what is reasonable, of course, will vary with the circumstances” and the manner in which the plaintiff enters the premises. It was unreasonable for the store not to check the floor regularly and keep it dry 304 [6.580]

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as there was a likelihood of water being carried inside from the customers’ clothes, umbrellas and shoes.

[6.610] There are limits on liability and each case will depend upon its own facts. In Dulhunty v J B Young Ltd (1975) 50 ALJR 150, the plaintiff slipped on a grape on an otherwise clean floor in the defendant’s shop. She claimed damages for negligence. The plaintiff lost her case because there was no evidence that the defendant had caused her injury by any act or omission of care. The plaintiff failed to prove how long the grape had been on the floor or who had dropped it. In addition, there was no evidence to show whether the defendant would have had reasonable time to clean the floor before the accident occurred. In the absence of sufficient evidence from the plaintiff her action failed because the court said there was nothing to establish that the defendant had acted in breach of their duty of care. In Romeo v Conservation Commission (NT) (1998) 192 CLR 431 (see [6.630]), the High Court stated that an occupier was not liable for every fall or injury and that they were entitled to assume that most people would take reasonable care for their own safety. In Modbury Triangle Shopping Centre Pty Ltd v Anzil (2000) 205 CLR 254 a shopping centre worker was attacked and injured by strangers in the car park of the centre whilst leaving work. He sued the centre for damages for personal injuries inflicted by the three unknown men who criminally assaulted him in the car park. He claimed that the car park lights had been negligently left off by the centre and this caused the attack. The main issue was whether an occupier of land may be liable for negligence to a person who is injured by deliberate wrongful acts of a third party whilst on the premises. The High Court concluded the centre did not owe a duty of care to protect employees from being injured by criminal behaviour of third parties as it lacked control over the car park (the degree of employers control was relevant). By way of contrast see Adeels Palace v Moubarak [2009] HCA 48 in [6.820]. In Cole v South Tweed Heads Rugby League Football Club (2004) 217 CLR 469; [2004] HCA 29, a woman member walked out of the club after consuming a large amount of alcohol and was struck by a car. She sued the club for negligence. The High Court agreed that it had not breached its duty of care as they had tried to look after her and had offered her a courtesy bus. The judges recognised that the club had no right to detain her and it was impossible for it to monitor the amount of drinking of each and every member. An interesting recent case raised the question of the liability of the Commonwealth of Australia for the health of inmates in detention centres. In SBEG v Commonwealth of Australia (2012) 208 FCR 235; [2012] FCAFC 189 at [1]-[2], the Federal Court said: 1.

The appellant is a young stateless man. Prior to December 2010, he left Kuwait with his family and they travelled through Syria and [6.610] 305

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Malaysia and then by boat to Indonesia. In December 2010 the appellant travelled by boat from Indonesia to Christmas Island. Since then, the appellant has been detained as an unlawful non-citizen by the Commonwealth of Australia pursuant to the provisions of the Migration Act 1958 (Cth) (the Act). The appellant has a history of psychiatric problems. While in detention, he has engaged in incidents of self-harm, including an unsuccessful attempt to hang himself. Expert medical opinion is to the effect that, as a result of the circumstances of his detention, his mental health has been adversely affected …

2.

Arguments offered in the appellant’s favour suggested that if he had been detained in an environment where he was free to come and go as he wished, and that if he had certainty about the future, his mental health would have improved. The primary judge (at [106] and [107]) stated that: “The applicant’s … case is that the level of medical care reasonably designed to meet his health care needs requires detention in a community setting and that the Commonwealth’s failure to arrange that is a breach of its duty of care.” This argument failed. At [48] of the reasons for judgment the Court says: “To the extent that the appellant has been detained as statute requires, or in the valid exercise of an administrative power, the respondent’s conduct cannot give rise to a liability in tort: Northern Territory v Mengel (1995) 185 CLR 307 at 356.”

Liability for the conduct of others: vicarious liability [6.620] The liability for the conduct of others can arise from an independent duty of care or from vicarious liability. An example of the first category is the liability of a parent for the wrongdoing of a child. Parents, or persons “in loco parentis”, who stand in the place of a parent, have a duty to exercise reasonable care in relation to children under their control. A parent is not automatically responsible for the tortious actions of a child. The duty is to take reasonable care that a child under the parent’s control will not harm another person, taking into account the age of the child and the tendency of a child to do childish things. “Vicarious liability” means liability for the actions of others. It applies mostly in an employment relationship and in the case of principals and agents. In tort, employers are vicariously liable for the acts of employees carried out in the course of employment. If an employee commits a tort in the course of employment the employer is vicariously liable and can be sued in damages. The plaintiff can sue the employee or the employer. It does not matter that the employer did not personally commit the negligent act. However, to succeed against the employer, the plaintiff must show that the employee was acting in the course of employment. In Cassidy v Ministry of Health [1951] 2 KB 343, the plaintiff was admitted to hospital for a minor operation on his two stiff fingers. The resulting treatment 306 [6.620]

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caused him to have four stiff fingers. Although it could not be determined exactly which hospital employee’s negligence caused the damage, the court held that there was negligence by hospital employees and the hospital was vicariously liable to compensate the plaintiff. At common law, the plaintiff can sue the employee for a personal breach of duty to the plaintiff and/or sue the employer under the doctrine of vicarious liability. In turn, the employer can seek reimbursement from the employee for the money paid to the plaintiff. However, some States have passed legislation abolishing the right of the employer to recover from the employee. Section 3 of the Employees Liability Act 1991 (NSW) provides that where both the employer and employee are found liable in negligence, the employee is not required to reimburse an employer for damages arising from the tortious conduct; but the employer may be liable to indemnify the employee for any damages they have been ordered to pay (unless the employee was engaged in serious or wilful misconduct). In Gordon v Tamworth Jockey Club Inc [2003] Aust Torts Reports 81-698, an employee cleaner of the club, while drunk, threw a bottle which smashed near the plaintiff. Shortly thereafter the employee assaulted the plaintiff. The Court of Appeal held that the club was not vicariously liable because its duty did not extend to exercising reasonable care to prevent criminal conduct of an employee. The assault was outside the cleaner’s duties and so was not committed in the course of employment. Recently, the High Court has considered the liability of an employer for the intentional criminal conduct of its employees. In New South Wales v Lepore (2003) 212 CLR 511, the Court limited vicarious liability in employment to two situations: • where the conduct occurred in the intended performance of the employment contract; or • where the conduct occurred in the apparent pursuit of the employer’s business. In 2012 vicarious liability for unauthorised acts of employees was raised in Blake v JR Perry Pty Ltd [2012] VSCA 122. B was employed as a fuel tanker driver by JRP. B and several other JRP employed drivers went to Portland Dockyards to refuel a ship on its arrival. However, the ship was delayed for a long time and due to boredom a fellow driver J (as a joke) struck B behind the knees without warning causing him to fall and suffer serious back injuries. B sued his employer JRP claiming it was vicariously liable for the behaviour of its employee J. The Court of Appeal decided JRP was not vicariously liable for J’s practical joke because it was not connected with his employment. In addition J’s actions were not done to further the employers interest nor was it done with the employers authority nor was it a consequence of J’s employment. The court adopted principles previously laid down by the High Court in Lepore’s case and concluded it would not be fair or just to hold JRP liable for the damage caused by the prank committed by J. [6.620] 307

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A recent decision in the Full Federal Court has again highlighted the significant implications of vicarious liability for employers. In Richardson v Oracle Corporation Australia Pty Ltd [2014] FCAFC 82, Ms R sued her employer OCA for damages for multiple incidents of sexual harassment by a fellow employee. The company argued it had provided online training to staff about the issues of sexual harassment. However, the court stated such training had been insufficient because it failed to clearly specify such conduct was strictly prohibited under legislation. Accordingly, OCA was vicariously liable for sexual harassment of R in the workplace. The Full Court increased her damages from $18,000 to $130,000. This case suggests that courts favour the public sentiment about payment of compensation for pain and suffering caused to victims of workplace sexual harassment.

Liability of public authorities [6.630] In Pyrenees Shire Council v Day (1998) 192 CLR 330, a council inspected residential premises and discovered the fireplace was unsafe. Although it ordered the owner to rectify the defects, the council did nothing to enforce the order when the owner did not cooperate. A fire injured the tenant who sued the council. The High Court held there was no general duty of care on any public authority where someone relies upon it doing something. There may, however, be a duty if there is a reasonable reliance on it and this was reasonably foreseeable by the authority. The council had breached its duty to the tenant in this case. This case showed a council could be liable for not doing something (non-feasance). The liability of public authorities for failing to do something was again considered in Romeo v Conservation Commission (NT) (1998) 192 CLR 431, where the plaintiff consumed a large quantity of alcohol while in a reserve, fell off a cliff-top and was injured. She sued the council (which had control over the reserve) for breach of duty claiming among other things that the council should have fenced off the cliff. The High Court found the plaintiff had been drunk and inattentive. The council had not been negligent. Although it recognised the council was under a general duty of care to take reasonable steps to prevent persons entering the reserve from getting injured, it decided that the cliff was obvious to everyone and did not require fencing. In Graham Barclay Oysters v Ryan (2002) 211 CLR 540, about 400 people contracted hepatitis A after consuming contaminated oysters from Wallis Lake. They sued the State of New South Wales and the Great Lakes Council for damages. The High Court decided that there was no duty of care owed to the plaintiff in this case. The High Court conducted what was described as a “multi-faceted” inquiry that examined: • the extent that the defendants had control over the harm; • the degree of vulnerability of the plaintiffs; and 308 [6.630]

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• the consistency of the duty of care in comparison with the purpose or scope of any relevant statutes. Although it was possible that more adequate health warnings and other safeguards might have reduced the risk of injury, the Court believed that in the circumstances neither the State Government nor the council should be held liable for the injuries. This case confirmed that government bodies did not necessarily owe a duty of care simply because they had some statutory powers to introduce some preventative measures or policies. In Vairy v Wyong Shire Council (2005) 80 ALJR 1; [2005] HCA 62 and Mulligan v Coffs Harbour City Council (2005) 80 ALJR 43; [2005] HCA 63 the High Court considered the duty of care of local councils to provide warnings to the public about the dangers of diving into shallow water. The judges made the general observation that the councils involved in these cases did not breach any duty of care by failing to warn swimmers that diving into rock pools or creeks might be dangerous. As the activities involved obvious and inherent risks it was very questionable that warning signs would have had any practical value. Lack of displaying signs did not justify a finding of negligence. Each case depends upon its own facts and one problem for public authorities is where a number of prior complaints have been ignored. In Coffs Harbour Council v McLeod [2016] NSWCA 94 the plaintiff (M) slipped on a green slimy section of footpath maintained by the Council. He suffered injuries. He sued the Council for negligence. Evidence suggested water seeped up from and across the path depending on the weather and there had been three prior incidents of falls on that section of path (all of which had been reported to Council). The District Court accepted that the fall occurred due to the wet path and that Council owed M a duty of care to ensure the public area was reasonably safe for public pedestrian access. It had breached its duty of care because it did nothing to reduce the risk which was reasonably foreseeable and not insignificant. M was awarded over $96,000 in damages. The NSW Supreme Court refused leave to appeal as it agreed with the trial judge’s decision.

Liability for defective products [6.640] The makers of defective goods have a liability in the tort of negligence, as well as liability under various statutes ie there is statutory protection for consumers of defective goods. Up until 2011 the Trade Practices Act 1974 (Cth) was a major source of legal action for consumers who purchase defective or dangerous products and, to a large extent, consumer protection legislation has taken over from the common law in respect of defective or dangerous goods. From 2011 consumers receive protection under the Competition and Consumer Act 2010 (Cth) (see Topic 5). This means that liability may be imposed by either the common law or statute or perhaps both. [6.640] 309

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Liability for dangerous activities/criminal offences (non-delegable) [6.650] In certain circumstances the law imposes a duty of care that cannot be delegated to others. This almost amounts to a form of strict liability but operates under the ordinary principles of negligence. For example, where owners of premises store dangerous or hazardous materials that may escape and cause damage, the liability may be limited to the owner even where the negligence/wrongful act occurred by the conduct of others. Case study [6.660] In Burnie Port Authority v General Jones Pty Ltd (1994) 179 CLR 520, General Jones Ltd was leasing part of a building owned and occupied by the Authority. The Authority engaged subcontractors to extend the building. This work involved welding in the roof. During welding operations by the subcontractors sparks fell onto some cartons of inflammable material called Isolite that had been brought into the building and stored there by the Authority. The welding work had apparently been carried out too close to the cartons and the sparks ignited the material. Although the material was supposed to be difficult to ignite, if it caught fire it would burn fiercely. The resulting fire spread to General Jones’ shop and damaged its stock. It sued the Authority for negligence. The High Court held that the proper approach to determine liability was to examine the duty of care owed. The Court held that the Authority was liable because its subcontractors were careless; the Authority owed General Jones a non-delegable duty of care. This meant that the Authority could not pass that duty on to someone else and the Authority could not escape liability by showing the negligence to have been caused by someone else. A reasonably prudent person would exercise a higher degree of care where danger was higher. Indeed, depending upon the magnitude of the danger the standard of “reasonable care” may involve a degree of diligence so high as to almost amount to a guarantee of safety. As it was clear that the subcontractor did not take reasonable care, the Authority was liable in negligence.

[6.670] Non-delegable duty of care may also apply in employment situations. In New South Wales v Lepore; Samin v Queensland; Rich v Queensland (2003) 212 CLR 511, the High Court dealt with two matters. The first part of these cases is dealt with in [6.620]. The last two cases involved a teacher in a country school sexually molesting two girl pupils. One of the issues in both cases was whether the school authority was liable in damages to the pupils for breach of a non-delegable duty of care. The Court decided that holding the school authority liable for an injury accidentally or intentionally inflicted on a pupil by a teacher was too wide an application of the principle of non-delegable duty of care. It would impose upon any school authority too demanding a responsibility. The Court observed that school authorities have imposed upon 310 [6.650]

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them a very high standard of care and that extends to the provision of a system to prevent sexual abuse of pupils. The school authority could not be held responsible for sexual acts of its employees if there was no fault on its part. The Court stated that there was no duty to ensure that students were not physically injured by teachers, but rather it was a duty to take reasonable care to ensure that students were properly supervised to see that they did not suffer harm. Gaudron J commented that a non-delegable duty meant no more than taking reasonable care to avoid a foreseeable risk of injury. In Eaton v Tricare (Country) Pty Ltd [2016] QCA 139, E sued an aged care facility for psychiatric illness caused to her by pressure and harassment from her work manager H. She alleged she had been subject to offensive, intimidating and humiliating behaviour from H over a long period and as a result became depressed and suffered a psychiatric illness. The Queensland Court of Appeal held the aged care facility was vicariously liable for the behaviour of the manager H. Whilst it was not responsible to provide a happy or polite workplace it had a duty to ensure staff were not subject to aggressive or belittling conduct by its manager. The behaviour of H towards the plaintiff was a breach by the aged care facility of its non-delegable duty. Reasonable care required that H not behave towards E in a harassing and belittling fashion. This conduct had a real likelihood of causing such stress to E that in her vulnerable condition, she would develop a psychiatric illness. The court accepted the expert evidence of two independent psychiatrists and awarded E over $435,000 for future loss of earnings.

Duty of care and liability of bailees [6.680] The essential characteristic of bailment is that possession of chattels passes from the person with the right to possession, the bailor, to another, the bailee, for a specified or unspecified time or specified purpose. Possession must pass; ownership does not. If possession does not pass, there is no bailment. The bailee must be under a duty to return the goods to the bailor “in specie” (in its own form, and not in equivalent form) or to treat it in a particular way; for example, to return a car that has been repaired at a garage. A bailee must take reasonable care of the bailed goods unless, if there is a contract of bailment, the contract imposes a higher duty of care or a lower duty of care. What is reasonable will depend upon the particular facts of each case, whether the bailment is gratuitous or for reward and for whose benefit the bailment is. Clearly, for example, a person who looks after a friend’s car as a favour would owe a lesser duty than a commercial carpark that charged a fee for looking after the car. In Pitt Son & Badgery Ltd v Proulefco SA (1984) 153 CLR 644, a woolbroker occupied a woolstore where large quantities of wool were stored. The woolstore was unfenced, unlit and unattended and there was no fire sprinkler equipment. A vandal started a fire. The fire destroyed wool belonging to the plaintiff. The plaintiff sued the woolbroker for breach of duty as a bailee. The [6.680] 311

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court held that the woolbroker’s failure to provide fencing that was reasonably adequate to keep out intruders was in breach of its duty to take reasonable care to keep the wool safe. The damage to the wool was a direct result of this failure to take care and the woolbroker was liable in negligence.

DEFENCES TO NEGLIGENCE [6.690] There are three main defences to an action for negligence. They are: • voluntary assumption of risk; • contributory negligence; and • illegal enterprise.

Voluntary assumption of risk [6.700] Voluntary assumption of risk equates to consent. It is based on the notion that the plaintiff has waived their rights to complain about damages or injury. It may be a total defence to an action for negligence if a defendant can prove that the plaintiff voluntarily accepted the risk. This is sometimes known by the Latin maxim “volenti non fit injuria”. The defence requires that the plaintiff was fully aware of the risk and genuinely and totally assumed it. Mere knowledge of the risk by the plaintiff is not enough. The defendant must show that the plaintiff was aware of the specific risk and voluntarily consented to it. This defence is commonly argued in cases where drunken drivers are sued for damages by injured passengers. In Avran v Gusaroski (2006) 31 WAR 400; [2006] WASCA 16, the plaintiff was an intoxicated passenger in a car driven by the defendant (also intoxicated) when it crashed. At the original trial the driver was ordered to pay damages that were reduced by 30% due to the plaintiff’s contributory negligence. On appeal the driver argued that he should not pay any damages as the passenger voluntarily accepted the risk by allowing himself to be driven in the car. The Western Australian Court of Appeal disagreed and stated there was no voluntary assumption of risk. It was made clear that before this defence would be accepted it had to be shown that the passenger: • knew the driver was intoxicated; and • made a decision to be driven by the intoxicated driver. On the facts, the court concluded the driver was aggressive and has assaulted others in the past and despite repeated protests by the passenger, the driver refused to cooperate. The passenger had not been given reasonable time to decide what to do and he did not fully understand or voluntarily accept the risk of remaining in the car.

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Contributory negligence [6.710] At common law, any contributory negligence by the plaintiff was a complete bar to a claim for damages. However, legislation now provides that in cases where contributory negligence is found against the plaintiff, any damages are to be adjusted proportionally to the respective faults. It equates to apportionment of liability and damages. Courts can reduce damages by however much a plaintiff is shown to have contributed to their own losses or damages. In Cook v Hawkes (2002) 35 MVR 391; [2002] NSWCA 79, an accident occurred on George Street, Sydney. A pedestrian, Alan Hawkes, was hit by a courier van driven by Brian Cook at about 50 kilometres per hour. At the initial hearing the judge assessed the pedestrian’s contributory negligence at 50% and awarded damages to him of over $229,000. On appeal, the Court of Appeal concluded that the trial judge had made an error in apportioning blame. The pedestrian’s responsibility for the accident was substantially greater than the driver’s. The Court decided the pedestrian’s contribution to the accident was 75% and the driver 25%. Damages of only $93,000 were ordered instead of $229,000. In Avran v Gusaroski (2006) 31 WAR 400; [2006] WASCA 16 (see [6.700]), the appeal court agreed that it was appropriate that the plaintiff passenger should lose 30% of his damages on the basis of his own contributory negligence. At the time of the accident he had removed his seat belt and this had made his injuries more severe. The facts in Miller v Miller (2011) 242 CLR 446; [2011] HCA 9, raises the general question of the ability of a party to a joint criminal enterprise to sue another party in that enterprise, but where the series of events were complicated by a request to leave the vehicle. Danelle Miller (aged 16) and a number of her relatives, stole a car to get home from a night of drinking. Danelle’s cousin, Maurin Miller, aged 27 took the wheel, although he also had been drinking heavily. He drove erratically and dangerously and Danelle was afraid for her safety. She asked Maurin twice to stop and let her out of the vehicle, but he kept driving. Unfortunately he crashed and she suffered serious injury. By a majority of 6:1 (Heydon J, dissenting) the High Court found that Maurin was liable for Danelle’s injuries. The court found that the statutory purpose of the law forbidding the illegal use of a stolen car would be incongruous with a duty of care between joint illegal users of the vehicle. However, the Court also said that the passenger had withdrawn from the enterprise by requesting that the vehicle be stopped to allow her to get out. Note that in some jurisdictions, civil liability legislation may prevent recovery by criminals for damages suffered in an illegal act (eg ss 51-54 of the Civil Liability Act 2002 (NSW)). [6.710] 313

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Illegal enterprise [6.720] It is sometimes said that public policy would deny a claim for damages by a plaintiff who is engaged in an illegal activity at the time of the negligent act. The High Court has now held that the correct test is the test of proximity. In Gala v Preston (1991) 172 CLR 243, the plaintiff and the defendant were riding in a stolen car. The defendant drove the car negligently, the plaintiff was injured and he sued the defendant for damages. The High Court held that the plaintiff could not sue for damages. The plaintiff was unsuccessful, not because of any public policy, but because there was an insufficient relationship of proximity between the parties and the defendant. The only relationship was one based on an illegal enterprise. Even though there may have been a physical proximity, and even a causal proximity, any relationship arising from the facts in this and similar cases would be qualified by: • the nature of the joint enterprise; • the absence of any reliance by the plaintiff on the defendant exercising any standard of care; and • the plaintiff voluntarily and even enthusiastically accepting the risks of the enterprise. See the discussion of Miller v Miller (2011) 242 CLR 446; [2011] HCA 9 (a case with similar facts to Gala v Preston) at [6.710] where the High Court dealt with the defence of illegal enterprise ie whether a joint illegal enterprise negated a duty of care between the offenders. Note that under current Civil Liability legislation contributory negligence is recognised and can be used as a complete defence against awarding damages or at least allowing for damages to be reduced: see Boral Bricks Pty Ltd v Cosmidis (No 2) [2014] NSWCA 139 and T & X Company Pty Ltd v Chivas [2014] NSWCA 235 (and see [6.890]).

STATUTORY TORTS [6.730] The Trade Practices Act 1974 (Cth) and the new Competition and Consumer Act 2010 (Cth) (CCA) have imposed liability in various situations including: • liability for false statements; • liability for defective goods; • liability for unsafe goods; and • liability for defective services. It is open to the plaintiff, in many situations, to use actions under these statutes in addition to, or in substitution for, actions in tort. Generally it is not possible to exclude liability under these laws (see Topic 5).

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Excluding negligence [6.740] Potential defendants often try to avoid liability in tort by using exclusion or limitation clauses or disclaimers of liability. An exclusion clause excludes liability, a limitation clause limits liability and a disclaimer clause informs the reader that no responsibility is taken. These are common in contractual situations, particularly in bailments, but are also relevant to non-contract situations. For example, you might be walking into your college canteen and a sign says, “Building work in progress. Enter at your own risk”. Another example is the professional financial planner supplying a detailed investment/ retirement plan with a written disclaimer stating that they take no responsibility if the information was wrong. Exclusion clauses are more fully discussed in Chapter 15 (Miles), but we can make the following points here: • the defendant can only rely upon an exclusion clause if reasonable notice was given to the plaintiff before the contract or tortious conduct; • the courts tend to interpret ambiguous clauses in a way favourable to the plaintiff where the plaintiff is a consumer; and • liability in respect of defective goods or services, and in respect of unsafe goods, under the Trade Practices Act 1974 or Competition and Consumer Act 2010 (Cth) (CCA) cannot be excluded in consumer situations. See Topic 5.

STATUTORY LIMITS ON ACTIONS ARISING FROM MOTOR ACCIDENTS [6.750] In most jurisdictions in Australia, the right to damages in negligence for injuries received in motor vehicle accidents has been restricted. The right to sue has been converted to a right to claim under a statutory compensation scheme. From 5 October 1999, there was a new system of claiming compensation in relation to personal injuries caused by a motor vehicle accident on or after that particular date. The legislation is known as the Motor Accidents Compensation Act 1999 (NSW). This Act repeals the provisions of the Motor Accidents Act 1988 (NSW) although many of its provisions are retained in the newer Act. Section 109 prohibits court action being started more than 3 years after a motor vehicle accident without court leave. From the position of a plaintiff, the most drastic change to the motor vehicle accident claim is the introduction of payment of damages based on impairment rather than disabilities, pain and suffering. Not all claims are dealt with under this law. Matters that qualify under the scheme are referred to a medical assessor and unless there is permanent injury in excess of 10%, there can be no claim for general damages. In addition, there is a limit on general damages of $260,000 and there is no claim for the first five days of economic loss. Weekly compensation past and future is limited to $2,500 per week. The Motor Accidents Authority provides guidelines for handling claims and assessments and medical guidelines. The [6.750] 315

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Act will encourage early payment of medical expenses and funding for care in appropriate cases. However, many injured parties will be denied damages for non-economic loss because of the 10% impairment limit.

BREACHES OF STATUTORY DUTY [6.760] Where a statute creates a duty, it may also create a right in those persons for whose benefit the duty was created. This allows those persons to sue in tort for damages caused by a breach of that duty. This is called the tort of breach of statutory duty. Not all statutes create this right to sue. The courts tend to look at the purpose of the statute and ask several questions: • Does the plaintiff belong to the particular class of persons that the statute intended to protect? • Did the injury fall within the category of injuries the statute intended to prevent? • Does any penalty imposed by the statute include an action for damages? • Is the liability to be strict or must the plaintiff prove negligence?

STATUTORY CHANGES TO NEGLIGENCE [6.770] In 2002, the New South Wales Government expressed its concern about the types of negligence claims being allowed by the courts and the large payouts awarded by judges and juries. New South Wales passed the Civil Liability Act 2002 (NSW), hereafter referred to as the CLA, which commenced on 20 March 2002. As the relevant provisions in the NSW Act show, it is broad in its scope and applies to any legal proceedings commenced after that date that involved any claim for damages for harm resulting from negligence regardless of whether the claim was brought in tort, in contract or under statute law. In addition to personal injuries it also covers property damages and economic losses. One feature of the Act is its attempt to limit the scope of potential liability for negligence. To achieve this outcome the Act has (amongst other things) • modified the common law principles about negligence generally including defences; and • placed limitations of the rights of claimants to recover in some areas of negligence, eg recreational activities (s 5L) or peer professional opinion (s 5O). It applies to any legal proceedings commenced after that date that involved any claim for damages for harm resulting from negligence regardless of whether the claim was brought in tort, in contract or under statute law. This legislation has been amended by the Civil Liability Amendment (Personal Responsibility) Act 2002 (NSW). This amending Act deals with various issues including liability for negligence and limits the class of claimants who can recover for psychiatric injuries. Sections regarding nervous shock and 316 [6.760]

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criminals applied retrospectively from 3 September 2003. All other sections applied retrospectively from 6 December 2002. Although these new laws are designed to replace some existing common law principles the Acts recognise some of what the courts have stated about personal responsibility. Plaintiffs are required to pay proper attention to their own safety and defendants generally have no duty of care where the risks are obvious. Further changes have been made by: • Civil Liability Amendment Act 2003 – most parts of which commenced on 19 December 2003; • Civil Liability Amendment (Offender Damages) Act 2004 – which commenced on 15 November 2004; and • Legal Profession Act 2004 – which commenced on 1 October 2005.

Legislation in other States/Territories [6.780] All the other States and Territories have introduced their own legislative changes to the laws of negligence. Whilst there is yet no uniformity across Australia it essentially makes it more difficult for a plaintiff to succeed in a negligence case for a personal injury claim. The Acts reforming civil liability law outside NSW include: • Civil Liability Act 2002 (WA) • Civil Liability Act 2002 (Tas) • Civil Law (Wrongs) Act 2002 (ACT) • Civil Liability Act 2003 (Qld) • Civil Liability Act 1936 (SA) • Wrongs Act 1958 (Vic) and Wrongs and Other Acts (Law of Negligence) Act 2003 (Vic). • Personal Injuries (Liabilities and Damages) Act 2003 (NT). Later amendments to some of these laws have resulted in various changes to their original reforms.

Civil Liability Act 2002 (NSW): how it applies to negligence [6.790] The Civil Liability Act 2002 (NSW) is outlined in the following format. Part 1: Preliminaries (ss 3 – 4) Covers definitions and when Act does not apply (exclusions). Part 1A: Negligence Division 1: Definitions and application Division 2: Duty of care (ss 5B – 5C) Division 3: Causation (ss 5D – 5E) Division 4: Assumption of risk (ss 5F – 5I) Division 5: Recreational activities (ss 5J – 5N) Division 6: Professional negligence (ss 5O – 5P) [6.790] 317

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Division 7: Vicarious liability (s 5Q) Division 8: Contributory negligence (ss 5R – 5T) Part 2: Personal Injuries Division 1: Preliminaries Division 2: Damages for economic losses (ss 12 – 15C) Division 3: Damages for non-economic losses (ss 16 – 17A) Division 4: Interest on damages (s 18) Division 5: Third party contributions (s 19) Division 6: Exemplary damages (s 21) Division 7: Structured settlements (ss 22 – 26) Part 2A: Special provisions for offenders in custody (ss 26A – 26X) Part 3: Mental harm (ss 27 – 33) Part 4: Proportionate liability (ss 34 – 39) Part 5: Liability of public authorities (ss 40 – 46) Part 6: Intoxication (ss 47 – 50) Part 7: Self defence Division 1: Limits to damages (ss 51 – 54A) Division 2: Supervision of damages (ss 54B – 54H) Part 8 Good Samaritans (ss 55 – 58) Part 8A: Food donors (ss 58A – 58C) Part 9: Volunteers (ss 59 – 66) Part 10: Apologies (ss 67 – 69) Part 11: Damages for child birth (ss 70 – 71).

How does the Act define negligence? [6.800] In section 5 Definitions negligence is defined as the “failure to exercise reasonable care and skill”.

Duty of care [6.810] Division 2 s 5B provides that a person is not negligent in failing to take precautions against a risk of harm unless: • the risk was foreseeable; • the risk was not insignificant; and • a reasonable person (in the same position) would have taken those precautions. In deciding whether a reasonable person would have taken precautions against a risk of harm the court may consider matters including: • the probability of harm; • the seriousness of the harm; • the burden of taking precautions to avoid the risk; and • the social utility of the activity creating the risk. 318 [6.800]

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Causation (did the negligence cause the harm) [6.820] Causation has been the subject of careful analysis by Australian appellate courts recently (see Amaca & Ors v Ellis [2010] HCA 5 and Woolworths v Strong [2010] NSWCA 282 below). The common law question of causation involved both the application of the “but for” test and then the question of whether a defendant was legally responsible for the damage which their negligence has played some part in producing. Under the Civil Liability Act 2002 the common law position has been modified by Div 3 s 5D(1) which states: 1.

A determination that negligence caused particular harm comprises the following elements: (a)

that the negligence was a necessary condition of the occurrence of the harm (factual causation), and

(b)

that it is appropriate for the scope for the negligent person’s liability to extend to the harm so caused (scope of liability).

Section 5D(3)(a), (b) provide that if it is relevant in deciding factual causation to look at what the plaintiff would have done if the defendant had not been negligent: • the matter is to be determined subjectively in the light of all relevant circumstances; and • any statement made by the plaintiff after suffering the harm about what they would have done is inadmissible except to the extent the statement is against their interests. However, in Hoyts Pty Ltd v Burns (2003) 77 ALJR 1934, the High Court looked at statements by a plaintiff about what they would have done if the defendant had not been negligent. Burns was injured when she attempted to sit down on a retractable theatre seat. She argued there should have been warning signs posted and had she seen them she would not have been injured. Kirby J commented (at [54]): the evidence of what a claimant would have done if a non-existent warning had been given by a hypothetical sign is so hypothetical, self-serving and speculative as to deserve little (if any) weight, at least in most circumstances.

Under the common law the liability of a defendant extended only to the foreseeable consequences of their breach of duty. It was usually accepted that there were limits to the “but for” test as a reliable method of deciding causation; especially where there was intervention by a third party. A common limit on liability was voluntary and independent acts of third parties such as in Yates v Jones[1990] Aust Torts Reports 67,632 (81-009): see [6.450]. In Yu Mei Chu v State Rail Authority [2007] NSWDC 41, Goldring DCJ found the State Rail Authority (SRA) liable to compensate a woman who broke her ankle when she fell down stairs at a city railway station. It was proved that the defendant had breached its duty of care by painting the steps with low friction [6.820] 319

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paint. Some weeks later the plaintiff was raped. She alleged that she was unable to escape because of her broken ankle and she claimed that she would have been able to successfully repel the man and escape but for her injured leg. The judge considered s 5D of the CLA and held that “but for” the injured ankle she would not have suffered the sexual assault and its mental consequences. It was therefore appropriate to impose responsibility on the SRA for the psychological harm as its negligence was the cause of her ankle injury. On appeal to the NSW Court of Appeal the SRA was successful in convincing the judges it was not liable for all the damages. The Court of Appeal agreed that there was a clear break in the chain of events and the SRA could not have foreseen the assault and it was not responsible for the criminal conduct of others. The court re-assessed the damages and substantially reduced the allowance for non-economic losses. This case seems to suggest that an intervening event (such as criminal conduct by others) that results in injury and other losses cannot be blamed on the negligence of the party who caused the original injury. In Amaca Pty Ltd v Ellis (2010) 240 CLR 111; [2010] HCA 5 (3 March 2010) the High Court considered the question of causation in circumstances where there was more than one possible cause of injury and the plaintiff had been engaged in successive breaches of his duties. A claim was made on behalf of the plaintiff who died of lung cancer. The plaintiff had been a regular smoker for over 26 years and was also exposed to asbestos fibres in the course of working for several employers. A claim was made against the employers alleging the cancer had been caused by the asbestos. The main issue decided was causation. The High Court stated it was insufficient to show that the inhalation of asbestos fibres merely increased the risk of cancer. Rather it was necessary to show that the exposure to asbestos was actually a cause of the lung cancer in the plaintiff. This was a fact that needed to be proven (on the balance of probabilities) that it was more likely than not that the employers negligence caused the cancer. It was concluded that the asbestos had only a 23% chance of being involved in the development of the cancer and so on the balance of probabilities it was not a “material cause” of the cancer. In Strong v Woolworths Ltd (2012) 86 ALJR 267; [2012] HCA 5 the High Court addressed the problems in slip and fall cases. Here the plaintiff slipped on a greasy potato chip on the floor in an area under the control of Woolworths. The majority decided that Woolworths had breached its duty of care by not following its cleaning system (cleaning the floor every 20 minutes). However the High Court agreed that s 5D of the CLA(NSW) had not been proven because the plaintiff failed to prove on the balance of probabilities that the shop’s negligence caused her to fall and get injured. The judges agreed that even if correct cleaning systems were followed there was no guarantee that this would have prevented the fall as it was unknown for how long the chip was on the floor. 320 [6.820]

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In Adeels Palace Pty Limited v Moubarak; Adeels Palace Pty Limited v Bou Najem (2009) 260 ALR 628; [2009] HCA 48 M and N were at a function at Adeels Palace Restaurant (AP) when a fight occurred and the offender was struck in the face by M. Later the offender returned with a gun and shot both M & N. They sued the restaurant for damages claiming negligence in failing to provide proper security. On appeal the High Court found AP owed a duty of care even though the injuries were caused by a criminal act. In relation to this, the High Court distinguished the circumstances from the Modbury Triangle case (see [6.610]) where the court stated that a defendant will not generally be held liable for the criminal acts of third parties. The High Court noted that here AP had control over the premises at the relevant time and this included its obligations under the relevant licensing law. The High Court did not need to decide whether the AP’s security was sufficient in the circumstances. The court decided this case on the issue of causation. It held that the “but for” test of factual causation in s 5D of the CLA(NSW) was applicable. The test was not satisfied here. The plaintiffs failed to prove that it was more probable than not that, but for the absence of security, the shootings would not have taken place. It was also held not to be an “exceptional case within the meaning of subsection 5D(2)” (which allows courts to find in exceptional cases that factual causation is established even if the “but for” test is not satisfied).

Assumption of risk [6.830] As mentioned in [6.700], the common law accepted voluntary assumption of risk as a defence against negligence. Division 4 of the Act also recognises a defence to a negligence claim by codifying a form of volenti non fit injuria (no wrong is done to one who is willing). Under s 5F it is a defence to a claim if the risk to the plaintiff was an “obvious risk”. Perhaps self-evidently obvious risk is a risk that, in the circumstances, would have been obvious to a reasonable person in the position of that person. Division 4 (ss 5F – 5I) – make it more difficult to succeed in negligence where there are obvious or inherent risks. In general terms: 1.

a plaintiff may not be able to claim negligence where risk would have been obvious to a reasonable person;

2.

there is a presumption that the injured plaintiff was aware of an obvious risk;

3.

in certain situations, there is no duty of care on a defendant to warn about an obvious risk; and

4.

there is no liability for negligence merely because harm was suffered as a result of the materialisation of an inherent risk.

In relation to point 3 above a defendant has no duty to warn of an obvious risk unless: • the plaintiff has requested advice or information from the defendant; [6.830] 321

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• there is a requirement for the defendant to warn the plaintiff; • the defendant is a professional. The High Court in Derrick v Cheung (2001) 181 ALR 301 recognised that simply because a vehicle is involved in a collision (even with a pedestrian) it does not automatically mean there was negligence. Liability for negligence is not shown simply because some other actions by the driver may have avoided the collision. This decision was applied and followed by the New South Wales Court of Appeal in four subsequent cases involving motor vehicle accidents. In Dennis v Keep [2002] NSWCA 227; Knight v Maclean [2002] NSWCA 314; Lieng v Delvers (2002) 36 MVR 401; and Spanswick v Laguzza (2002) 35 MVR 501 the Court of Appeal found either there was no negligence or that the drivers had not broken their duty of care. These decisions have had a major impact on plaintiffs commencing court action for motor vehicle accidents. Motor vehicle drivers are legally entitled to drive on the road with the traffic flow. Even in situations where unfortunate events are foreseeable (such as a pedestrian running out onto the road, a cyclist falling off their bike or a car turning across a line of traffic) drivers are not required to act differently unless there is a real possibility of an accident occurring. In several cases in 2002 the New South Wales Court of Appeal confirmed there is an overriding duty upon pedestrians to take care for their own safety. Each of the cases involved pedestrians walking along footpaths and tripping over an “obvious hazard”. Lombardi v Holroyd City Council [2002] NSWCA 252 was decided first and this case was closely followed by three similar decisions all handed down on the same day (Richmond Valley Council v Standing (2002) 127 LGERA 237; [2002] Aust Torts Reports 81-679; RTA v McGuiness [2003] Aust Torts Reports 81-688; and Burwood Council v Byrnes [2002] NSWCA 343). The court decided in each case that the existence of foreseeable risk of injury was not by itself sufficient to create any liability. The court clearly recognised that the conditions of the accident sites were so obvious and so typical of normal city life that no duty of care arose to rectify or otherwise warn anyone about the risks. From the decisions in these cases it appears that plaintiffs in negligence claims must be able to show the courts more than just a reasonably foreseeable risk of harm. There is now a requirement to show: • that the losses alleged are not the result of their own careless conduct; and • that in all the circumstances, it is reasonable for the duty of care to be imposed upon the defendant. Most of these decisions appear to agree with the changes introduced by the CLA particularly ss 5D(1) and 5F – 5I dealing with causation and assumption of risk. 322 [6.830]

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Dangerous recreational activities [6.840] The Civil Liability Act 2002 (NSW) has also introduced changes by recognising the concept of “dangerous recreational activity” in an attempt to limit the circumstances under which a defendant may be liable for negligence. Section 5L of the CLA states that a defendant is not liable for harm suffered by a plaintiff as a result of the materialisation of an obvious risk of a dangerous recreational activity engaged in by the plaintiff. There have been several recent cases that involved alleged dangerous recreational activities. In Falvo v Australian Oztag Sports Association [2006] Aust Torts Reports 81-831; [2006] NSWCA 17, the NSW Supreme Court of Appeal unanimously agreed that a player injured whilst playing a form of touch football on an uneven surface was unable to succeed in a claim for negligence because he failed to prove that his injuries were caused by any careless act or omission on the part of the sport association. Although the sport itself was not seen as dangerous, the court stated that players had to be prepared to accept that there were risks involved in playing sports on surfaces of less than perfect standards. Case study [6.850] In Fallas v Mourlas (2006) 65 NSWLR 418; [2006] NSWCA 32, the plaintiff and three other men were engaged in night shooting kangaroos in the bush with the aid of a spotlight affixed to a motor vehicle. Fallas was driving and Mourlas operated the spotlight. Fallas left the vehicle with a handgun whilst Mourlas held the spotlight in the vehicle. Later, Fallas returned to the vehicle still holding the handgun. Mourlas asked him not to enter the vehicle with a loaded gun. Fallas gave repeated assurances that the gun was not loaded. Fallas entered the vehicle and Mourlas again asked him not to bring the gun into the vehicle and to point it outside. Fallas began to try to unjam the gun and when doing so it was pointed at Mourlas. The gun discharged and Mourlas was shot in the leg. He sued for damages in negligence. At the original trial the court found in favour of Mourlas and awarded him over $98,000 in damages. Fallas appealed to the NSW Court of Appeal and the main issue before the court was whether Fallas could avoid negligence by relying on s 5L of the Civil Liability Act 2002, ie the plaintiff was injured by the happening of an obvious risk during dangerous recreational activities. The majority of the court found that kangaroo hunting was a dangerous recreational activity. There was a significant risk of harm because there were several men, inexperienced with loaded firearms and under the influence of alcohol. It was possible they might handle a loaded firearm in a negligent manner and injure someone in the vehicle. However, the judges agreed with the original trial judge that Mourlas was entitled to damages for negligence because Fallas was grossly negligent. The court recognised that the defendant continually and repeatedly ignored the serious requests by Mourlas to be careful.

[6.850] 323

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Case study [6.860] In Campbell v Hay [2014] NSWCA 129, the Court of Appeal applied a common sense approach to a consideration of what constituted a “dangerous recreational activity” under s 5L of the CLA. In this case the court found that if a litigant relies on s 5L of the CLA, it is a complete defence. That is, no liability will be attributed to a defendant if the harm sustained was a result of an obvious risk materialising from a dangerous recreational activity. This means that no liability will be established even where there has been a finding of negligence pursuant to s 5B of the CLA. In this case, Campbell (C) was taking a flying lesson with the instructor Hay (H) in a Jabiru aircraft flown out of Katoomba Airfield at Medlow Bath in the NSW Blue Mountains region. H was an experienced pilot and flight instructor of many years standing. H noticed a faint set of engine vibrations, made some corrections and continued the lesson, directing C to turn back for the return leg of the flight. A second set of engine vibrations occurred only five minutes later becoming noticeably stronger. H took over the controls and guided the aircraft into a nearby paddock, where the aircraft made a forced landing. C claimed he had suffered injuries from the landing but both parties walked away from the crash scene. At the first trial the District Court found H to have been negligent in the way he responded to the second occasion of aircraft vibrations, but the court held H was not liable for the negligence because C’s injuries were sustained as a result of the materialisation of an obvious risk of a dangerous recreational activity within the meaning of ss 5F and 5K of the CLA. The defence under s 5L meant that no liability was attributed to H, despite the finding that he had been found negligent. C appealed and H sought to have the negligence finding dismissed without varying the District Court’s ultimate decision which was in his favour (ie he requested the Supreme Court to examine the original decision that he had been negligent). The Court of Appeal upheld the findings of the District Court in respect of the s 5L defence, and agreed that flying an aircraft under supervision of an instructor was a “dangerous recreational activity”. This meant it involved a significant risk of physical harm and such risk was significant if there was a real chance of it occurring. However the Appeal Court rejected the District Court’s findings of negligence on the part of H on the basis C had failed to establish causation. In addition the court stated that liability for negligence was based on what a party did rather than what they believed. The court found that the expert evidence at the original hearing did not support the conclusion of breach of a duty of care in not diverting the plane towards a nearby landing strip. The conduct of H in delaying in heading towards a landing strip could not be criticised as H would have been occupied in making adjustments and trying to rectify the vibrations The actions of H were reasonable and there was no evidence to suggest that H should have concluded that a second set of vibrations would have resulted in an engine failure. The earlier argument that H had relied upon luck and therefore had delayed in taking over the controls from C was rejected. It was acknowledged that H’s skill and experience was the reason for a safe landing. 324 [6.860]

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This decision is important as it establishes a strong precedent for what is required to establish a defence under s 5L of the CLA. That is, what is a dangerous recreational activity must be identified from an objective point of view, and with a common sense approach. Further, the failure to exercise reasonable care should not be concluded from a person’s thoughts or beliefs, but from their actions. A delay to act (in this case taking over the controls or diverting to a paddock rather than a landing strip) could not be shown to have caused the harm where there was no evidence that either of these would have prevented or lessened C’s injuries. In Whittingon v Smeaton [2016] ACTSC 76 the plaintiff (W) was a pillion passenger on a jet ski owned by Todd. Whilst Scott was towing his brother Todd who was water skiing behind the jet ski W acted as spotter (observer). His role as a spotter was to sit on the back of the jet ski facing the waterskier and recognise hand signals given by the waterskier and convey them to the driver, to notify the driver if the skier fell off, and pull the towrope out of the water. W notified Scott that Todd had fallen off. Scott then started turning the jet ski around. W leaned forward to take the slack out of the towrope and at that point the jet ski hit the wake of another boat. The wake made the jet ski unstable and W fell into the water and his leg became tangled in the towrope and his foot was cut off. W sued both Todd and Scott (and the Insurance Company) for negligence in the ACT Supreme Court. Both Scott and Todd admitted the existence of a duty of care but denied that they had breached their duty of care. They both pleaded an immunity from liability under s 19 of the Civil Liability Act 2003 (Qld) (the Act) on the basis of a materialisation of an obvious risk during participation in a dangerous recreational activity. (This is almost identical with s 5K of the Civil Liability Act 2002 (NSW).) Expert evidence given in court was that a spotter on a jet ski was not an activity that involved a significant risk of harm and as a result the court found W had not engaged in a “dangerous recreational activity” and so the defendants were unable to rely upon that defence. In addition the injury was far from being a materialisation of an obvious risk. Mossop J recognised that a rear facing passenger might become unbalanced or dislodged from the jet ski and suffer injury, and so the risk of harm was foreseeable and was not insignificant. Reasonable persons in the position of the brothers would have taken precautions against the risk, and the failure to take the precautions identified was a necessary condition of the occurrence of the harm. Accordingly, the court upheld W’s claim against the defendants and insurance company and awarded damages of $800,000.

Professional negligence and the scope of peer professional defence [6.870] Division 6, a defence to professional negligence – s 5O provides that a professional does not incur liability for negligence arising from providing a professional service if it is established they acted in a manner widely accepted by peer professional opinion as being competent, professional practice (unless the court considers that opinion is “irrational”). [6.870] 325

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All other States apart from the ACT and Northern Territory have similar sections but Victoria uses the term “unreasonable” instead or irrational. As a result both the ACT and NT have no equivalent defences for professionals and are left with the application of the common law. One of the first medical cases to examine the professional standard of care under s 50 of the Civil Liability Act 2002 (NSW) (CLA) was Dobler v Kenneth Halverson (2007) 70 NSWLR 151; [2007] NSWCA 335 where a patient sued his doctor (a general practitioner) for negligence alleging his doctor failed to diagnose his cardiac problem that resulted in cardiac arrest and brain damage. It was claimed the doctor should have referred the patient to a cardiologist or at least carried out an ECG and that failure to take these steps was a breach of the doctor’s duty of care. The judge stated that s 50 of the CLA was a “defence” to a claim for negligence, ie s 50 was a defence available to a defendant once a breach of a duty of care has been established. It was confirmed that s 50 does not replace the standard of care but rather operated as a defence. Accordingly once a defendant fails to satisfy a court that he/she has exercised reasonable care, he/she may avoid liability by showing they acted in a manner which was widely accepted by peer professionals as competent practice. The court heard evidence from expert witnesses for both parties and the judge preferred the evidence of the patient’s witnesses (who were all expert general practitioners) and found the doctor should have ordered an ECG. The court found the doctor had made inappropriate assumptions about the facts and had not met the requirements of the defence under s 50. The patient was entitled to damages. Another illustration of how NSW courts applied the peer acceptance defence under s 50 of the CLA was Walker v Sydney West Area Health Service [2007] Aust Torts Reports 81-892; [2007] NSWSC 526. Walker, a 19-year-old mental patient, became a quadriplegic as a result of a failed suicide attempt shortly after being discharged from the psychiatric ward of a hospital. He sued the area health service for negligence and claimed the hospital should have prescribed him anti-depressant/anti-psychotic medicine, counselled him and not released him. Expert evidence was presented from both sides. Justice Simpson found hospital doctors had assessed Walker and decided not to supply him with drugs due to his drinking problem which could have caused a reaction to the medication. It was discovered that the health service had conducted home visits after Walker was discharged during which time he had claimed he was feeling better. The court accepted evidence that no prolonged hospital admission, drug/alcohol programs, medication or psychotherapy would have benefited the plaintiff. The injuries suffered by the plaintiff were the result of his own actions and arose from conditions that were not remediable by the available forms of care. The judge accepted the defence under s 50 of the CLA ruling that the hospital staff had not failed to act in a manner that was widely accepted in Australia by peer professional opinion as competent professional practice. As a result the court dismissed the claim for negligence. 326 [6.870]

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In summary, the defence of peer professional opinion in s 50 appears to require: • proof that the professional fell short of the required standard of care • proof that the professional was not liable because it was established that when they performed or omitted to perform the conduct in question they acted in a manner widely accepted by peer professional opinion as competent professional practice • proof that such belief was rational. In MD v Sydney Southwest Area Health Service [2009] NSWDC 24, Goldring DCJ stated that if a professional seeks to rely on the defence under s 50 of the CLA they must expressly and clearly disclose this defence in their original pleadings otherwise they may be excluded from producing evidence to support their defence when the case starts. Problems may arise where common law duties conflict with statutory duties. A recent case in the High Court illustrates how difficult it may become for relatives injured by mentally ill patients to prove they were owed a common law duty of care (where statute laws impose different obligations). On 12th November 2014 the High Court handed down its decision in Hunter & New England Local Health District v McKenna & Simon [2014] HCA 44. P had a long history of paranoia and was admitted and detained in a hospital under the Mental Health Act 1990. After obtaining P’s records and discussions with P’s family and a friend R they all agreed that P be detained overnight and then P would be driven home by R where he would receive continued medical treatment. Unfortunately the next day when P was released he killed R on the journey home and then committed suicide. R’s family suffered emotional shock and sued the hospital and psychiatrist for negligence for placing P’s care in the hands of R. The NSW District Court stated that under s 5B(1) of the CLA (the Act) the plaintiffs had not succeeded in proving the hospital (as a reasonable person) would have concluded there was a significant risk in the situation and so there was no negligence. In addition it found in favour of the psychiatrist under s 5O of the Act because he had acted in a manner widely accepted by peer professional opinion as competent professional practice. A majority decision of the NSW Court of Appeal found that the hospital and psychiatrist owed a duty to take reasonable care to prevent P causing harm to R and that s 5O could not be relied upon. The High Court allowed an appeal and on 12th November 2014 unanimously overturned the decision. It stated that any duty of care depended on the construction of the Mental Health Act 1990. The Act intended to keep to a minimum any restrictions on the liberty and rights of mentally ill patients. In addition s 20 prohibited the detention of P unless there was no less restrictive appropriate care reasonably available. Even though discharging a psychiatric patient could give rise to a duty of care to protect [6.870] 327

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others from a risk, such a duty of care was inconsistent with the hospital’s obligations and the patient’s rights under the Act which required minimum interference with P’s liberty. These statutory obligations were inconsistent with the common law duties of care towards anyone P may have come into contact with after being discharged. Where such a conflict arises this would ordinarily be a reason to deny the duty of care. Accordingly the hospital and psychiatrist had statutory duties under the Act and it was on this basis that it allowed the appeal and found that neither the hospital nor psychiatrist owed the relatives a duty of care in the circumstances. It is interesting to note that the Mental Health Act 1990 was replaced by the Mental Health Act 2007 but s 20 remains the same. Where statute laws provide rights for mentally ill patients over the rights of others there are obvious problems. The effects of the McKenna case for the general community are significant, as practitioners in the mental health field may not be held liable for treatment decisions such as the discharge of a patient in particular circumstances. In McKenna, the hospital’s decision to discharge the mentally ill patient was considered to be inappropriate but the hospital and staff were not held liable. Note from the earlier case of Sullivan v Moody (at [6.350]) the difficulties where common law duties may not be compatible with duties imposed by statute law.

Non-delegable duty and vicarious liability [6.880] Division 7, non-delegable duty and vicarious liability – s 5Q suggests that non-delegable duty of care is determined as if it was vicarious liability.

Contributory negligence [6.890] Division 8, contributory negligence – ss 5R – 5T recognise contributory negligence and allow a court to reduce damages by 100% if just and equitable. The maximum amount for non-economic losses (pain and suffering, loss of enjoyment of life) is $350,000 (subject to indexation) and this will only be in extreme cases. In the recent decision of Boral Bricks Pty Limited v Cosmidis (No 2) [2014] NSWCA 139 the NSW Court of Appeal considered s 5R of the CLA in the context of how contributory negligence is to be approached in motor accident cases. In this case C delivered a tanker load of fuel to Boral (B) and later he was struck from behind by a forklift when returning to his tanker and as a result suffered significant injuries. C sued B for negligence. The District Court judge (amongst other things) held that C was not guilty of contributory negligence. The Court of Appeal set aside his findings on that issue. In this case, the court held that s 5R of the CLA reflected the public policy of personal responsibility, ie people must take responsibility for their own lives. If each party was equally careless, liability should be shared equally. The court noted that the effect of s 5R (which applied in motor accident cases) was to apply the same standard of care to the conduct of the victim as to the conduct of the defendant. The 328 [6.880]

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court found that C had been careless because he was (or should have been) aware of the presence of the forklift. Balancing that carelessness against the carelessness of the forklift operator, and the failure of B to maintain a safe system of work on their premises, C’s contributory negligence was assessed at 30%. The Court of Appeal’s interpretation of s 5R in the Boral case was endorsed by the majority of the Court of Appeal in T & X Company Pty Limited v Chivas [2014] NSWCA 235. Here a taxi was driving down Market Street, Sydney on a public holiday and there were many pedestrians about, some of whom were ignoring lights and running across roads. The taxi was moving at about 50kph and when proceeding through a green light at an intersection C ran across the road and was struck by the taxi and killed. The trial judge held that the driver of the taxi was negligent, assessing damages at just under $800,000 which were reduced by 40% for the contributory negligence of C (the deceased). On appeal the Supreme Court agreed the taxi driver had been negligent because there were many pedestrians and the city was busy and the driver should have proceeded more cautiously at a speed closer to 40kph. Had he braked immediately or slowed down the deceased would have had sufficient time to clear the taxi’s lane and the accident would have been avoided. The court stated that contributory negligence was now the product of legislation and not common law and that the test in s 5R applied to the case and required the court to weigh the conduct of the deceased against the risk of harm equally with the conduct taken by the driver. It was not correct to impose a higher degree of care on the driver. Ultimately the “weighty factor” in assessing contributory negligence was C’s decision to run across the road against the red pedestrian signal in the face of oncoming traffic. The court decided that in all the circumstances, this justified an increase in the assessment of C’s contributory negligence to 75%.

Statutory torts Economic and non-economic losses [6.900] Part 2, economic and non-economic losses – ss 12 – 26 impose limits on the quantum of damages. • The maximum amount for non-economic losses (pain and suffering, loss of enjoyment of life) is $535,000 (subject to indexation) and this will only be in extreme cases. • Where the severity of such losses is between 15%–33% of the most extreme case, damages are determined by a sliding scale in a table set out in the Act. • In the assessment of economic losses (eg loss of earnings) there is no minimum amount but there are maximum limits. The courts must disregard any amount by which the plaintiff’s gross weekly earnings exceeds an amount that is three times the average weekly income, ie the maximum [6.900] 329

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weekly payment is limited to 3 × AWE (average weekly earnings). In 2014 the High Court examined the operation of s 12 of the CLA in the case of Taylor v The Owners–Strata Plan 11564 [2014] HCA 9. T was killed when an awning outside a shop in Balgowlah collapsed. His widow commenced proceedings seeking damages under ss 3 and 4 of the Compensation to Relatives Act 1897 (NSW) (Relatives Act) which allowed a claim for compensation by close relatives of a person whose death was caused by negligence (if they proved they had previously relied on the financial/other support of the deceased person). The issue was whether s 12 of the CLA applied to limit the amount of damages to 3xAWE as T earned far more than this amount. The question for the High Court was whether the statutory limitations of s 12 of the CLA applied to the claim made by the widow under the Relatives Act, ie were damages to be capped? The High Court indicated the purpose of the CLA was to limit damages in claims for personal injury of high earning individuals but not in cases involving the Relatives Act. The court found s 12(2) of the CLA did not limit the widow’s (or other relevant dependants’) claim for damages pursuant to ss 3 and 4 of the Relatives Act. It is interesting to note that in the future the NSW parliament will have to decide whether to change the CLA or Relatives Act to avoid this inconsistency. • Parties are given a reasonable opportunity to negotiate a structured settlement. Courts may order that any award of damages is to be part of a structured settlement, ie periodic payments instead of a lump sum. • Punitive, exemplary and aggravated damages are no longer available in New South Wales. • Discount rates for future economic loss have been increased to 5%. This means the Federal Government has changed the tax laws to reduce the amount of tax payable on structured settlements involving claims for personal injury or death. All lump sum payments for lost earnings are taxed to take account of the possible interest that could be earned.

Mental harm [6.910] Part 3, mental harm – ss 27 – 33 impose some restrictions on claiming damages for pure mental harm from shock. Generally no recovery of damages is allowed unless the plaintiff witnessed the accident or was a close family member of the victim. However in a recent High Court decision in Wicks v State Rail Authority of NSW (2010) 241 CLR 60; [2010] HCA 22 it was decided that whilst s 30 of the Civil Liability Act 2002(NSW) did limit the persons entitled to recover damages for pure mental harm (once a duty of care was proven) the class of persons was not simply limited to those actually present at the time of the accident but could include rescuers who arrived later. The case below outlines who can claim for nervous shock, and the differences in the statute laws between South Australia and New South Wales. 330 [6.910]

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On 10 June 2015 the High Court of Australia handed down its decision in King v Philcox [2015] HCA 19. In that case the plaintiff (P) was informed that his brother Scott had died in a motor accident at around 5.30pm caused by the negligent driving of K. P was shocked to realise that it was the same accident he had driven past several times earlier that same day being totally unaware of the parties involved. He suffered guilt and depression for not knowing or stopping after the accident had occurred and he imagined his brother dying without his help. He sued the driver K for negligence causing him mental harm. It was accepted by the Court that P had suffered mental harm within the meaning of the South Australian Civil Liability Act 1936, ie it was a recognised psychiatric illness (depression) as a result of sudden shock upon receiving the news of his brother’s death. Section 53 of the Act provided that in such “nervous shock” cases for pure mental harm, if the Plaintiff was not the parent, spouse, domestic partner or child of the person killed, injured or endangered in the accident, then damages may not be awarded to the Plaintiff unless they themselves were present at the scene of the accident when the accident occurred. P did not fall within the class of persons listed in the Act and he was not present when the accident occurred. As a result, the High Court held that P was precluded from being awarded damages. However, in New South Wales, the Civil Liability Act 2002 operates. Section 30 of the Act provides that where a Plaintiff did not actually witness the victim being killed, injured or put in peril, that person may still be awarded damages for pure mental harm arising from shock if they are “a close member of the family” (which includes a parent, spouse, child or brother/sister of the deceased). Under the NSW Act, those persons defined and listed above as being close family members would be entitled to bring a claim for damages for any mental harm sustained as a result of their family member being killed, injured or put in peril as a result of a defendant’s negligence, despite not being a witness present at the scene when the accident occurred. Therefore, had this accident with similar facts and circumstances occurred in New South Wales, P may have succeeded.

Proportionate liability [6.920] Part 4, where there were concurrent wrongdoers ie where more than one person has contributed to the same damages liability may be apportioned between them. In Kayteal Pty Ltd v Dignan [2011] NSWSC 197 Kayteal (K) lent $780,000 to B based on a valuation done by Dignan that the land owned by B was worth $1.2 million. In fact the land had only been recently purchased by B for only $52,000. K took a mortgage over B’s land as security and used solicitors to act on the mortgage. B failed to make payments and went bankrupt. K sued all three for negligence. Brereton J apportioned liability between the three wrongdoers as follows: B 47.5%, Dignan 40% (he was grossly negligent in his valuation), the solicitors 12.5%. [6.920] 331

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Liability of public/other authorities [6.930] Part 5, liability of public/other authorities – ss 40 – 46 provide limited protection for public authorities against liability for personal injuries, death, damage to property or economic losses caused by the performance of their public responsibilities.

Intoxication [6.940] Part 6, intoxication – ss 47 – 50 place restrictions on the legal rights of intoxicated persons to recover damages for negligence.

Self-defence and recovery by criminals [6.950] Part 7, self-defence and recovery by criminals – ss 51 – 54 provide for no civil liability for acts of self-defence and restricts the rights of criminals to be awarded damages for negligent conduct.

Good samaritans [6.960] Part 8, good samaritans – ss 55 – 58 partly protect rescuers and those helping in emergencies from being held liable for negligence.

Volunteers [6.970] Part 9, volunteers – ss 59 – 66 partially protect community groups/ charities from being sued for damages for careless behaviour.

Apology [6.980] Part 10, apology – ss 67 – 69 provide that any expression of regret or sympathy is not taken as admission of liability and it is inadmissible in civil proceedings as evidence of liability.

Legal practitioners [6.990] The Act has made changes to the Legal Profession Act 1987 (NSW) imposing obligations on legal practitioners not to bring negligence proceedings in difficult cases. Legal practitioners are prohibited from supplying legal services in relation to a claim/defence for damages unless they believe the claim/defence has “reasonable prospects of success”. Failure to do so amounts to professional misconduct and the courts may award costs against the offender. This now makes it difficult for plaintiffs to commence legal action for negligence and damages unless there are reasonable prospects of success. It poses a problem for any party who may have a difficult case to be resolved by the courts. The NSW Court of Appeal has recently provided some guidance on the meaning of “reasonable prospects of success”. In Lemoto v Able Technical Pty Ltd (2005) 63 NSWLR 300; [2005] NSWCA 153, the judges stated that the mere fact a party loses a case does not mean costs should be ordered against the legal adviser. The court said that the main focus should be on whether the legal 332 [6.930]

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adviser held a reasonable belief that the facts and legal views meant that the prospects of success were “fairly arguable”. The Office of the Legal Services Commissioner (Queensland Law Society) Fact Sheet dated January 2011 specified that any legal practitioner must reasonably believe on the basis of provable facts and on the basis of a reasonable view of the law that the claim or defence has reasonable prospects of success. If a legal practitioner acted without such prospects of success a court may order them to personally be liable for costs incurred by their clients or the other party. In NSW the Office of the Legal Services Commissioner (OLSC) is an independent statutory body established under the Legal Profession Act 1987 (NSW). The Legal Services Commissioner receives all complaints about solicitors and barristers in New South Wales. In addition to receiving complaints, the Legal Services Commissioner: 1.

Oversees the investigation of complaints;

2.

Plays a major role in resolving consumer disputes; and

3.

May take disciplinary action against a solicitor or barrister, or commence disciplinary proceedings in the NSW Civil and Administrative Tribunal (NCAT) – Occupational Division.

Revision questions 1.

Bill and Hillary are friends. Bill has recently retired and now has $450,000 in super. He asks Hillary, an accountant, if he should invest $200,000 of his super funds in Midget Widgets Ltd. Hillary tells Bill that she has looked at the accounts of that company and it is a good investment. Hilary does NOT charge Bill for her services as they are friends. Unfortunately, Hillary has misread the accounts of the company, which is almost insolvent. Bill invests his money and Midget Widget immediately goes into liquidation and Bill loses all $200,000. Bill discovers that many accountants/financial planners were aware of the poor financial position of the company and warnings had been published in several accounting journals and financial newspapers that Midget Widget was in financial trouble. Discuss whether Bill has any legal rights against Hilary. In your answer consider if the legal position would be different if Hilary had charged Bill for her services.

2.

What are the essential elements required for a successful negligence claim at common law?

3.

What is the standard of proof required in a negligence case (a civil matter)? Which party has the burden of proof?

4.

What are the main remedies for a plaintiff in a negligence action?

5.

“Under the Civil Liability Act 2002 (NSW) a person is not necessarily negligent simply for failing to take precautions against a risk of injury/harm.” Is this statement correct? [6.990] 333

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6.

Read the case study on Campbell v Hay at [6.860]. Why did the finding of negligence in the District Court case have no impact on the defendant’s liability in that first decision?

7.

If a court was considering an issue of negligence under the Civil Liability Act 2002 (NSW) what matters would it need to examine when deciding whether a defendant should have taken precautions against a risk?

334 [6.990]

TOPIC 7 Law of Agency What is agency?............................................................................... Classification of agents ...................................................................... The nature of the relationship between principal and agent ...................... Capacity to act as an agent ................................................................ Common agency relationships............................................................ The source and scope of agency.......................................................... Authority ........................................................................................ Ratification...................................................................................... Agency by operation of law................................................................ The doctrine of undisclosed principal ................................................... The duties of an agent ...................................................................... Rights of agents ............................................................................... The liabilities of agents ...................................................................... Termination of agency ...................................................................... Statutory regulation of agents.............................................................

[7.10] [7.20] [7.30] [7.40] [7.50] [7.60] [7.70] [7.130] [7.140] [7.150] [7.160] [7.170] [7.180] [7.190] [7.200]

Extract from Davenport S and Parker D, Business and Law in Australia (Lawbook Co., 2015), Chapter 13.

Terminology Below are some of the key terms that are used in this Topic: • Employee: a person employed under a contract of service and subject to the control of an employer regarding the manner in which his or her work is to be done. • Estoppel: a rule of law which prevents a person from denying the truth of some statement or representation formerly made by him or her, and on which another person has relied to their detriment, to the knowledge of the maker of the statement or representation. • Fiduciary: a fiduciary is someone who has a duty of absolute loyalty to another. • Independent contractor: a person employed under a contract for services who undertakes to produce a given result for an agreed price. • Principal: the person who appoints an agent to act on their behalf. • Ratification: the act of adopting a transaction by a person who was not bound by it originally. • Trust: a fiduciary relationship where a person, called the trustee holds the title (legal or equitable) of property for the benefit of another person, called the beneficiary. 335

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PRINCIPLES Introduction What is agency? [7.10] In International Harvester Co of Australia Pty Ltd v Carrigan’s Hazeldene Pastoral Co (1958) 100 CLR 644 at 652 the High Court stated: “[a]gency is a word used in the law to connote an authority or capacity in one person to create legal relations between a person occupying the position of principal and third parties”. There are, therefore, three important actors in an agency relationship: the principal, the agent, and third parties. In some legal relationships, such as company and company director, agency will be assumed. In others, the grant of authority must be specifically shown. Almost any legal transaction that a person can enter into themselves can also be transacted through an agent. An agent acting on authority granted by the principal may negotiate, make representations, receive money or enter into contracts on behalf of their principal. They may also render the principal liable in tort. The relationship of agency is sometimes described as the agent “stepping into the shoes” of the principal, ie, the action of the agent is, in law, the action of the principal. The actions of the agent will be legally binding on the principal but, except in special circumstances, not on the agent. Authority is a critical aspect of this relationship because it is only authorised actions that will bind the principal in this way. Case study Cassar v Crime Commission (NSW) [2014] NSWCA 356

[7.15] Various of C's assets were forfeited to the Crown under the Criminal Assets Recovery Act 1990 (NSW) after he was charged with a number of drug and other offences. A warranty that C had no other property was signed by C’s solicitor, Goold, thus triggering the forfeiture of C’s interest in two Swiss bank accounts which had not been disclosed. C argued that as the warranty was given in relation to a criminal matter, it could only be given personally and not by an agent. The New South Wales Court of Appeal held that there was no exclusion of the operation of the law of agency by the legislation and that Goold had apparent authority to give the warranty.

Classification of agents [7.20] Agents may be classified as: • special — an agent to carry out a special or private task, so the authority is limited to that task; • general — an agent to act for a principal continually in business such as a manager, or in a trade or profession, such as a solicitor or broker, and who will have some implied as well as express authority;

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• universal — an agent with authority to do all things on behalf of the principal, usually under a broad power of attorney. • del credere — a person who, in addition to the normal duties of an agent, guarantees payment by third parties to the principal in return for extra commission • factor — a mercantile agent who, in the usual course of their business, has possession of the goods, or the documents of title to the goods, of their principal and who can sell or pledge the goods whereby the principal is bound by such sale or pledge Figure 7.1: Agency

The fact that an agency relationship has been created will not mean that the agent can bind his or her principal to any transaction. It is only actions performed with the authority of the principal that will be binding. It may be helpful to ask whether or not the agent was authorised to do this particular act. What was the purpose for which authority was granted? Was the agent acting in their capacity as agent when they entered into the transaction or were they acting for their own benefit? Case study Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165

[7.25] The appellant, a carrier, was contracted by a third party to transport a temperature-sensitive flu vaccine belonging to Alphapharm. The vaccine was not kept at the minimum temperatures required and was rejected by Alphapharm's customers. The contract included a clause excluding the carrier from liability for loss. The High Court referred to the statement of Dixon AJ in Press v Mathers [1927] VLR 326 where he said: “in any ordinary case the question whether one person authorized another to do an act or series of acts on his behalf is best answered by considering for whose benefit or in whose interest it was intended it should be done.” The third party was contracting on behalf of Alphapharm with their authority; accordingly the exclusion clause was binding on Alphapharm.

The nature of the relationship between principal and agent [7.30] Where an agency relationship exists the parties are in a fiduciary relationship. This is a relationship of trust and loyalty. It was developed in [7.30] 337

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equity to give extra protection to the parties, and fiduciaries are subject to a much higher standard of behaviour than exists in other legal relationships. The parties to a contract, eg, are entitled to look after their own interests, as long as they abide by the terms of the contract. A fiduciary on the other hand, must place the interests of their principal ahead of their own and take care to avoid any conflict of duty. They are also prohibited from obtaining a profit or benefit from the position, without first obtaining the fully informed consent of the principal.

Capacity to act as an agent [7.40] Because an agent acts on behalf of another person they do not need to have the legal capacity to be personally capable of performing the act. It is the principal’s capacity that is important. An infant is able to appoint an agent, but the agent will only be able to bind the infant to the same extent as the infant could bind themselves.

Common agency relationships [7.50] Many common business relationships may also bring an agency into existence. Some of these include: • Solicitors and their clients • Partners to each other • Company directors and their companies • Real estate agents and auctioneers are agents to their clients • Travel agents • Mercantile agents • Brokers, eg, share or insurance brokers. In many of these professions the agent must also hold a licence issued by the regulating authority. For example, real estate agents must be licensed under the Property, Stock and Business Agents Act 2002 (NSW) and solicitors must hold a practising certificate under the Legal Profession Act 2004 (NSW), s 41. Licensing of these professionals usually includes a requirement for professional indemnity insurance which will provide an additional means of recovery if a client (the principal) suffers loss as a result of the fraud or negligence of the agent. Company directors, who act as agents for their companies, are subject to the provisions of the Corporations Act 2001 (Cth). Legislation also governs one of the most common forms of agency, ie, the power of attorney. Under the Powers of Attorney Act 2003 (NSW), eg, a “prescribed power of attorney confers on the attorney the authority to do on behalf of the principal anything that the principal may lawfully authorise an attorney to do”: s 9. Agency overlaps with some other relationships: • employee — an employee is subject to control by the employer regarding the manner in which their work is to be done. They are employed under a 338 [7.40]

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contract of service. Whether an employee is an agent for the employer depends on whether the employee’s actions fall within the scope of their employment (eg, a shop assistant would normally be an agent to sell the employer’s retail goods); • independent contractor — an independent contractor is not an employee as he or she has a high level of discretion as to how to carry out the work required under a contract for services. An independent contractor may also be an agent (eg, an auctioneer). Independent contractors are governed under the Independent Contractors Act 2006 (Cth) rather than industrial and labour laws such as the Fair Work Act 2009 (Cth). • trustee — a trustee is not an agent for the beneficiaries of the trust, rather the trustee is personally liable for contracts he or she enters with third parties. Although a trustee will always have fiduciary obligations he or she is not subject to the control or direction of the beneficiaries or creator of a trust in the same way an agent is subject to the control of his or her principal. Also, a trustee will usually be the legal title holder of the trust property whereas an agent does not have title to their principal’s property: see Chapter 29 (Davenport).

The source and scope of agency [7.60] There are three major sources of agency: • by authority given by the principal. The authority may be express, implied, or ostensible (apparent); • by ratification of the agent’s act; • by operation of law.

Authority [7.70] Except where the principal ratifies the agent’s acts, a principal will be liable only for what the agent does within his or her authority. To give an example, an agent who has authority to find a buyer for the principal’s house will not automatically have authority to sign the contract of sale or to receive the purchase price of the house on behalf of the principal. Case study UAERJ Pty Ltd v Jupiters Ltd [2014] NSWCA 213

[7.75] D was acting as an agent to produce musical tours by The Jacksons (for UAERG) and Mariah Carey (for Jupiters). When D's company was unable to supply the equipment and materials for the Mariah Carey concert Jupiters, relying on a representation from D that he was the promoter of The Jacksons' tour, agreed to fund the supply of equipment in return for an irrevocable direction to pay part of the ticket sale proceeds for some of The Jacksons' concerts to Jupiters. UAERJ claimed that D was not authorised to deal with the proceeds in the way that he had. [7.75] 339

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It was held that even though D did have authority to arrange the tours he did not have actual authority to use the money from the ticket sales for his own benefit, nor had UAERJ held D out as having ostensible authority to do so: see [7.120]. Even if D did have ostensible authority UAERJ would have been entitled to withdraw the directions to pay the ticket proceeds as there was no contractual obligation on them not to do so.

Express and implied actual authority [7.80] Actual authority exists when the principal grants authority for the performance of a specific task and the agent accepts this authority. Evidence of actual consent of both the principal and the agent must be found: Poulet Frais Pty Ltd v Silver Fox Company Pty Ltd (2005) 220 ALR 211. Consent may be express or implied; it may have been the subject of a written contract between the principal and the agent or it may have been given verbally. The emphasis here is on the relationship between the principal and the agent. Express actual authority

[7.90] The agent may be expressly appointed: • in writing either by deed, power of attorney or simple contract; or • verbally. Some types of agencies must be created in writing. For example, where the agent is to dispose of an interest in land the authority (power of attorney) must be created in writing and registered: eg, Powers of Attorney Act 2003 (NSW), s 52. Implied actual authority

[7.100] Implied actual authority is also based in actual consent of the principal and the agent; however, the consent is implied from the conduct of the parties, or from a course of dealing between them. There are a number of possible sources of implied authority. The implication may be made: • because it is necessarily incidental to the principal’s express instructions (eg, where the agent is authorised to buy certain shares, they have authority to do everything in the usual course of business to complete the transaction); • where a person is appointed as an officer of a company. The office bearer will have implied authority to do the things that someone holding that office would normally have. The managing director of a company would have implied authority to do those acts associated with the day-to-day management of the company. The chief financial officer would have authority to manage the financial dealings of the company. This type of authority is sometimes called “usual authority”;

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Case study Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50

[7.101] When the chairman of Equiticorp directed the use of liquidity reserves of an associated company (of which he was not a director) to reduce the indebtedness of one of the companies in the Equiticorp group it was held that he had no express actual authority; his actions had never been discussed at board level but he was held to have implied actual authority. The acquiescence of those who had authority was demonstrated by their subsequent conduct in giving effect to his decision.

Case study Markson v Cutler [2007] NSWSC 1515

[7.102] The usual authority of a real estate agent acting for the vendor of property did not extend to binding the vendor to accepting 5% deposit, when the contract specified 10%. A real estate agent has authority to find a purchaser, not to bind the vendor to terms with the purchaser.

[7.105] • if the authority is “implied from the conduct of the parties and the circumstances of the case”: Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 at 584 per Lord Denning. Corporations

[7.110] When the principal is a company the Corporations Act 2001 (Cth) supplements the general law. The company’s constitution will usually set out the directors’ powers. Express actual authority of a director may also derive from board resolutions or from acquiescence in the course of behaviour by persons who have actual authority to delegate. If the directors stand by while a single director acts outside his or her authority, the board’s acquiescence in that conduct can constitute the grant, by implication, of actual authority to enter into those transactions. Under the Corporations Act 2001 (Cth), ss 128 and 129 a person dealing with a corporation is entitled to assume: • that the company’s constitution and replaceable rules have been complied with; • that if, from information provided by the company that is available from ASIC, someone appears to be a director or secretary of a company they have been duly appointed and they have authority to exercise the powers and perform the duties customarily exercised or performed by a director or company secretary of a similar company. Similar provisions apply to someone who is held out by the company to be an officer of the company; • that the officers and agents of the company properly perform their duties to the company; [7.110] 341

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• that documents have been properly signed on behalf of the company. These assumptions can be made “even if an officer or agent of the company acts fraudulently, or forges a document, in connection with the dealings”: Corporations Act 2001 (Cth), s 128(3). Case study Australia and New Zealand Banking Group Ltd v Frenmast Pty Ltd (2013) 282 FLR 351

[7.115] One director of F forged the signature of another director onto a guarantee in favour of ANZ. ANZ relied on the assumption under s 129(5) of the Corporations Act 2001 (Cth) that the document had been duly executed. It was held that communications and negotiations between the director and ANZ about the guarantee were sufficient to fall within the words of s 129 which provides that assumptions are entitled to be made “in relation to dealings with a company”. By permitting the fraudulent director to continue to manage the banking relationship with ANZ the other directors and the company had clothed him with actual or ostensible authority to undertake communications and negotiations with ANZ and the bank was entitled to assume that the director, was “properly performing his duties and acting with care and diligence, in good faith and in the best interests of” the company.

Both express and implied actual authority are based on a relationship between the principal and agent. Ostensible authority is quite different. Ostensible or apparent authority

[7.120] An “apparent” or “ostensible” authority is the authority of an agent as it appears to others. It is a legal relationship between the principal and the third party created by a representation, made by the principal to the contractor, intended to be and in fact acted upon by the contractor that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the “apparent” authority. This representation must be made by the principal, not the agent. One of the most common means by which a principal may make a representation of ostensible authority is by allowing the agent to act in the management of the principal’s business. Ostensible authority often co-exists with actual authority although its scope may be greater or lesser. An express limitation on an agent’s actual authority will not necessarily place the same limit on ostensible authority. For example, the board of directors may expressly limit the authority of the managing director but he will still have ostensible authority to do all acts normally associated with the office of managing director. Ostensible authority is an example of estoppel by conduct. When the principal’s representation is acted upon by the third party entering into a contract with the agent, an estoppel arises, preventing the principal from

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asserting that he is not bound. If the third party knows that the agent does not have authority the estoppel cannot arise, since the third party did not rely on any representation by the principal. Case study Freeman v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480

[7.121] The defendant company acquired and developed land and K, with the full knowledge of the board, acted as managing director, although never formally appointed to the position. When K employed the plaintiff firm of architects, it was held that the contract of employment entered into by K was within the scope of his apparent or ostensible authority and so the company was liable for the architect's fees.

Case study Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549

[7.122] R had acted as Chairman of Brayhead Ltd although no formal appointment had ever been made. In this capacity he signed a number of contracts including a guarantee and an indemnity in favour of the plaintiff. While it was clear that R did not have the company's actual authority to commit it to the guarantee and indemnity it was held that authority could be implied from the conduct of the parties including the fact that he had acted as chief executive and on a number of previous occasions had committed the company to contracts without the prior knowledge or objection of the board, reporting the transactions at the subsequent board meeting.

Case study Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR 72

[7.123] A contract was signed by PM ostensibly on behalf of Crabtree. PM had no actual authority but had told the other party, in the presence of one of the directors of Crabtree (BM) that he was handling the negotiations for the purchase of machinery. The High Court held that the representation or holding out could not be made by PM himself.

Case study Prospect Industries Pty Ltd v Anscor Pty Ltd [2003] QSC 296

[7.125] When the court found that there was no actual authority for a financial planner to make a recommendation of a particular investment it was argued that the provision of pre-printed business cards stating that the company were “financial planners” could amount to a “holding out” by the principal. The court held that it could not or that even if it did, the plaintiff had not relied on the holding out in order to make the decision to invest.

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Ratification [7.130] Ratification is the subsequent adoption, by the principal, of the agent’s previously unauthorised actions. It is a retrospective confirmation of the agent’s action. Where ratification is effective the act will be valid from the date it was undertaken, not just from the date of ratification. Effective ratification requires that: • at the time of the transaction, the agent disclosed that they were acting for someone else; • the principal actually existed at that time and was capable of doing the act which is later ratified; • the ratification takes place within a reasonable time. If the principal does not ratify within a reasonable time after becoming aware of the unauthorised action of the agent they may be estopped from asserting their legal rights; • the whole of the unauthorised act is ratified, not merely parts. Case study Keighley, Maxsted & Co v Durant [1901] AC 240

[7.131] R had Keighley's authority to buy wheat at a certain price. He did not do so but later bought wheat at a higher price intending it to be on behalf of both himself and the appellant. R entered into the contract in his own name. K was unable to ratify the contract because, at the time the contract was entered into, R had not told the other party that he was acting on behalf of Keighley.

Case study Commonwealth Bank of Australia v Perrin [2011] QSC 274

[7.135] P forged the signatures of his wife and brother onto a guarantee. The bank failed to prove either that the wife had impliedly authorised her husband to sign the mortgage in her name, or that she had ratified the transaction by “doing nothing for about eight weeks after her learning of the transactions and the extent of the indebtedness”. Although she had, as a matter of course, signed share proxy forms and a number of other documents without reading them the court was not willing to find that, had she been asked, she would also have signed this mortgage. On the issue of ratification the court was unwilling to hold that the wife's actions showed an intention that was “unequivocably referable to an intention to adopt and be bound by the transaction: Petersen v Moloney.”

Agency by operation of law [7.140] Historically, the law has recognised that an agency will arise by operation of law in two situations:

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• by necessity — in an emergency where communication with the principal is not possible. Shipmasters are the most likely claimants of an agency of necessity although modern means of communication are far more reliable. Perilous situations of war or piracy may still lead to an agency of necessity. Most commonly this situation applies to the master of a ship who must act expeditiously to save the ship or its cargo. It also applies to deserted, married women who are able to pledge their husband’s credit in an emergency, where they do not have sufficient means of their own; • by cohabitation — traditionally a wife or de facto living with a man could pledge the credit for “necessaries”. This form of agency is of limited application in Australia today.

The doctrine of undisclosed principal [7.150] If an agent contracts on behalf of someone else without disclosing either the existence of the agency relationship or the identity of the principal: • the principal will be bound by the contract and may sue in their own name to enforce it provided that the agent was acting within the scope of their authority; • the agent may also sue on the contract; however, if they recover damages these must be remitted to the principal. If the principal chooses, they may intervene in the contract and bring an action in their own name; • once the third party becomes aware of the existence and identity of the principal they have an option to enforce the contract against the principal (but they cannot proceed against both). Any defences that are available against the agent will also be available in an action against the principal.

The duties of an agent [7.160] The main duties of an agent are to: • follow the principal’s instructions or they may be liable for any loss suffered by the principal as a result of a breach; • act in person as the principal is relying on the agent’s skill and knowledge (exceptions to this rule include where it is common trade usage to use a sub-agent, where the agent’s duties do not involve any discretion or skill, where it can be shown that it was intended to use a sub-agent and where unforeseen circumstances arise requiring agency delegation); • act in good faith — a fiduciary duty to act honestly in the best interests of the principal:

[7.160] 345

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Case study Armstrong v Jackson [1917] 2 KB 82

[7.161] A sharebroker, unbeknown to the buyer, sold him shares which the stockbroker owned. It was held that the buyer could rescind the contract as there had been a conflict of interest.

Case study Lintrose Nominees Pty Ltd v King [1995] 1 VR 574

[7.162] The agent acted both for the respondent purchaser (to give advice for a fee), and unknown to the respondent, the appellant vendor. It was held that the purchaser could rescind.

• make full disclosure of any personal interest; • not make a secret profit — the principal can recover such profits: Case study Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134

[7.163] A group of directors of a company bought and sold, for a large profit, shares in a subsidiary company. It was held that the directors were liable to account for the profits that they had made as a result of using their positions without the knowledge or consent of the parent company.

Case study McBride v Christie's Australia Pty Ltd [2014] NSWSC 1729

[7.164] S acted as M's agent in negotiating the sale of a painting. As part of the arrangement she was to receive a percentage of the dealer's commission on the sale of the painting. This was found to be in breach of her fiduciary obligations to M and she was ordered to repay the commission. The agent was also found to have engaged in misleading and deceptive conduct in relation to statements made about the authenticity and value of another artwork which she purchased as agent for M, as were Christie's, as auctioneers.

• exercise reasonable care and skill: Case study Mitor Investments Pty Ltd v General Accident Fire & Life Assurance Corporation Ltd [1984] WAR 365

[7.165] An insurance broker was instructed to obtain unqualified insurance coverage against damage caused by storm and flood but, unknown to the client, did not obtain coverage against flooding by sea. When the client suffered loss as a result of flooding by sea, the insurance company avoided

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liability. However, the broker was held liable because of his failure to exercise reasonable care and skill.

Rights of agents [7.170] The main rights of an agent are: • remuneration for their services and this will follow the terms of the agency agreement. Most issues regarding remuneration have arisen over selling agents’ rights to commission, which may depend on whether the agent has been the effective cause of a sale, and the wording of the agency contract, although in some jurisdictions there are statutory restrictions on the right to remuneration: Case study LJ Hooker Ltd v WJ Adams Estates Pty Ltd (1977) 138 CLR 52

[7.171] The respondent company owned a property and employed the appellant real estate agent to sell it for them. The appellant introduced Company A to the property while the respondent was negotiating with Company B. When the companies learnt of each other's interest, and unknown to either the appellant or the respondent, they entered into a joint venture agreement where each continued to negotiate on agreed terms and conditions but that if one of them was successful, they would work together to develop the site. Company B ultimately purchased the property from the respondent owner and it was held that the appellant estate agent was not entitled to commission as it had not been the effective cause of the sale to Company B, nor of the sale of any interest in the property to Company A.

Case study Rasmussen & Russo Pty Ltd v Gaviglio [1982] Qd R 571

[7.172] The vendor of land entered into an agreement with a real estate agent and agreed to pay commission if a valid and enforceable contract of sale was completed. The agents found a buyer who signed a contract “subject to bank finance” by a certain date, but the sale fell through when they couldn't obtain finance. Shortly after, the purchaser signed another contract through another agent who was able to arrange finance through a finance company. It was held that the first agent was not entitled to commission as they were not the effective cause of the sale.

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Case study Christie Owen & Davies Ltd v Rapacioli [1974] QB 781

[7.175] Where the plaintiffs introduced a prospective purchaser who was “ready, able and willing to purchase” and who signed a contract at a price which the defendant had agreed to accept, the refusal of the vendor to subsequently sign the contract did not prevent the agents from being entitled to their commission as the agent had completed their part of the agreement.

• indemnity and reimbursement for liabilities and expenses the agent lawfully incurs in carrying out the principal’s instructions; • lien or the right to hold property of the principal until the agent is paid.

The liabilities of agents [7.180] Generally an agent does not incur contractual liability because a contract will be between the principal and the third party. An agent may be liable: • to the principal if the agent breaches the agency agreement or is negligent; • to third parties in various situations: – if the agent discloses that there is a principal, whether or not the agent discloses the principal’s identity, the agent is liable only in limited circumstances such as where the agent acts outside his or her actual or apparent authority, or where the agent agrees to be liable: Case study Kelner v Baxter (1866) LR 2 CP 174

[7.181] Where a contract to buy goods was signed by the promoters of a company, the promoters were held liable as the contract was not contingent on the company being formed.

– if the agent does not disclose that there is a principal, the agent is personally liable, and the third party may also hold the principal liable when he or she becomes aware of a principal: Case study Clarkson, Booker Ltd v Andjel [1964] 2 QB 775

[7.182] The defendant had previously bought goods from the plaintiff as principal, but on the last occasion he bought goods as an agent for a company but did not disclose this fact to the plaintiffs. When payment was not made, the plaintiffs first brought an action against the company, but when it went into liquidation they successfully proceeded against the defendant, the court

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holding that the proceedings against the company were not a binding election that would bar proceedings against the defendant.

– if an agent expressly or impliedly warrants to third parties that the agent has authority to act, and if the agent is acting outside his or her authority, the agent breaches the warranty of authority, even though that authority may have come to an end by reason of facts of which they may not have been aware or could have known: Case study Yonge v Toynbee [1910] 1 KB 215

[7.183] A firm of solicitors were instructed by a client to act on his behalf. Before proceedings started the client, without the solicitors' knowledge, became insane, so the authority to act was terminated. However, it was not until after the solicitors had taken some steps in his defence that they discovered he had become insane. The plaintiff sought costs and it was held that as the solicitors had impliedly warranted that they had authority to act for their client, there had been a breach of that warranty and they were liable for costs.

– if an agent makes misrepresentations to a third party, the principal will normally be liable to the third party and the principal may, in turn, hold the agent liable; however, an agent will be directly liable to third parties for negligent statements; – if an agent is negligent, the agent is liable, but if the agent is acting within their apparent authority or the employer’s course of employment, the principal is also vicariously liable: Case study Lloyd v Grace, Smith & Co [1912] AC 716

[7.184] Where the managing clerk of a firm of solicitors fraudulently induced a client to sign property over to the clerk, it was held that the firm of solicitors was liable as the fraud of the clerk was committed within the scope of his apparent authority.

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Case study Deatons Pty Ltd v Flew (1949) 79 CLR 370

[7.185] Where a barmaid threw a glass of beer and then the glass into the face of a customer, it was held that the barmaid was not acting within the scope her employment in doing what she did and that the employer was thus not liable in damages to the customer. Her action was one of “passion and resentment” and not in any way connected with her job, which was to serve drinks. A mere temporal connection between employment and the improper or unlawful act of the employee is insufficient to give rise to vicarious liability.

But see: Case study Zorom Enterprises Pty Ltd v Zabow (2007) 71 NSWLR 354

[7.186] Where D suffered serious head injuries after being hit by a security guard employed by a hotel. The employer was held to be vicariously liable since the removal of disruptive patrons from the vicinity of the hotel was part of the authorised work of the security guard even though the way in which he undertook it on this occasion, with the use of excessive force, was unauthorised.

Termination of agency [7.190] The relationship of principal and agent will end on: • performance of the agency or end of the duration of the agency; • impossibility of performance (eg, destruction of the subject matter of the agency); • agreement of both parties to end the agency where it is still current; • revocation — where there is an express or implied term in the agency contract to end the agency; but the principal may be liable to third parties who do not have notice of the revocation, and the principal may be liable to the agent for expenses or losses, especially where the agency is irrevocable; • death, insanity or bankruptcy of the principal or agent, but bankruptcy of the agent may not necessarily terminate the agency; and • renunciation by the agent; but the agent may have to compensate the principal.

Statutory regulation of agents [7.200] Apart from regulation of particular agents such as stock brokers or real estate agents, Commonwealth, State and Territory legislation prohibits agents from corruptly profiting at the expense of their principals, eg, under the State Criminal Codes. 350 [7.185]

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Case study R v Nuttall [2011] 1 Qd R 270

[7.205] N, a former Cabinet Minister in the Queensland government, was jailed after being found guilty of taking secret commissions from coal mining executives totalling $360,000. He was convicted under s 442B of the Criminal Code 1899 (Qld). In the Code an “agent” was defined to include a Minister of the Crown and “principal” as including the Crown.

Guide to Problem Solving [7.210] Questions based on this Topic will typically ask about: Creation: Does a relationship of principal and agent exist? Authority: Does the agent have sufficient authority to bind the principal? What type of agency relationship has been created? Duties: Has the agent breached his or her duties to the principal? Is there a secret commission involved? Rights: What rights does an agent have in particular circumstances? Liabilities: When something has gone wrong, who will be liable — the principal, the agent, or both? Figure 7.2: Liability flowchart

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Revision questions 1

Tony is a bricklaying subcontractor working with his team on a building site for National Constructions. He and his team are the only ones on the site – the National Constructions supervisor is on another site for the day. A delivery truck from TimberWest arrives with a load of timber and the driver asks Tony to sign for it; Tony signs. The next day the supervisor returns to the site. He says that there has been a mistake and that National Constructions did not order the timber. He rings TimberWest to ask them to pick up the timber. TimberWest say that as far as they are concerned National Constructions have signed for the timber and will have to pay for it.

2

Go back to the facts in question 1. Later in the day that the timber arrived, rain is threatening and Tony knows that the timber needs to remain dry. He jumps in his car and buys an expensive tarpaulin on National Constructions’ account at Hardware House and covers the timber. When they get their monthly invoice from Hardware House, National Constructions’ office queries the tarpaulin charge with the site supervisor. Tony explains what happened to the supervisor. He says that National Constructions will not pay it because, if Tony had only called the office, they would have sent out someone with a tarpaulin straight away. Tony does not want the tarpaulin or to pay for it. Advise him.

3

Ross is grounds manager for Riverside Pty Limited, a company which runs a winery and resort in the Margaret River region of Western Australia. Riverside has been under some financial pressure. The board has directed Ross that he is not to enter into any transaction which will cost Riverside more than $5,000 without board consent. Ross forms the view that a new all-weather tennis court will greatly enhance the resort’s attractiveness. The court itself will cost about $15,000, but associated landscaping will cost another $10,000. Ross signs an agreement with the contractor on behalf of Riverside without telling the board. Work starts and the managing director asks the contractor what is going on. The contractor says that a $15,000 court is going in but does not mention the landscaping. The managing director tells the contractor to go ahead. Later that week the board of Riverside realises the full extent of the agreement and the financial commitment. Advise the board.

4

Douglas is a fencing subcontractor. He is working on a job for Hans, a landscape gardener. Douglas often works for Hans and quotes to Hans’s customers for the fencing component of prices. He thinks he also knows a good deal about how Hans prices his other work. While Douglas is working on a fence, a neighbour, Tania, asks what sort of money it would cost to landscape her backyard around her swimming pool.

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Douglas says it would cost $5,000. Tania asks whether Douglas has the authority to set the price. He says he does and she accepts the price and asks when work could start. Douglas says he will have to get back to her, but probably in ten days. Over a drink after work Douglas tells Hans about his conversation with Tania. Hans says the price Douglas quoted was under cost and that he would not have a hope of getting it done for two months. Advise Hans. 5

NatEng Ltd produces heavy machinery for the mining industry. It sometimes uses a specialist company, Overbearing Pty Ltd, to produce bearings for the heavy machinery. At NatEng’s request Overbearing produced, supplied and installed bearings for NatEng-supplied machinery in a coal mine owned by Queensland Coal. The machinery failed, injuring several workers and causing serious production delays. It appears that the bearings were not according to the specification in the contract between NatEng and Queensland Coal and repeated in NatEng’s order to Overbearing, and that Overbearing had negligently installed the bearings. Who could Queensland Coal take legal action against?

6

Sally and Brenda are both directors of Panda Childcare services. In order to obtain finance to expand their childcare services they agree between themselves that Sally should approach their friends and family for loans for the business. Sally’s mother Betty lends them money. Sally signs a personal guarantee for an advance of $250,000. She signs the guarantee “on behalf of Sally and Brenda, directors of Panda Childcare services”. Is Brenda bound to repay the money to Betty?

[7.210] 353

TOPIC 8 Intellectual Property Copyright ....................................................................................... Designs .......................................................................................... Patents........................................................................................... Trade marks .................................................................................... Passing off ...................................................................................... Character merchandising ................................................................... Confidential information.................................................................... Franchising .....................................................................................

[8.20] [8.1570] [8.1780] [8.2180] [8.2560] [8.2600] [8.2700] [8.2770]

Extract from C Turner and J Trone, Australian Commercial Law (31st ed, Lawbook Co., 2017), Chapter 30.

Introduction [8.10] The expression intellectual property is a general term encompassing the law relating to copyright, designs, patents, trade marks, passing off and confidential information. These particular areas of law are concerned with the legal protection of the creative manifestations of human thought whether in the form of literary, artistic or musical expression, which is the province of copyright law; or in the form of new inventions, which is the concern of patent law. Designs law is primarily concerned with the protection of industrial designs, that is, with the design or appearance of manufactured products. Trade marks law is concerned with the protection of a trader’s individual mark or symbol which distinguishes the particular trader’s goods or services from those of others in the market place. An action for passing off provides relief against those falsely representing their goods or services as those of another. The law of confidential information concerns the protection of information imparted to another in confidence against unauthorised use or disclosure. This topic also outlines the method of marketing goods and services by franchising because of the intellectual property aspects of this rapidly growing industry.

COPYRIGHT [8.20] Australian copyright law is contained in the Copyright Act 1968 (Cth) which came into operation on 1 May 1969. The Act repealed earlier copyright legislation then in force and was passed pursuant to s 51(xviii) of the Commonwealth Constitution which empowers the federal Parliament to make laws with respect to copyright, patents of inventions and designs, and trade marks.

[8.20] 355

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Nature of copyright [8.30] Copyright, as its name implies, is basically the right to reproduce or copy a particular form of expression, and thus a right to prevent others from doing so without the authority of the copyright owner. Basically, copyright comprises a number of exclusive rights, for example a right to reproduce or publish, in relation to certain categories of subject matter such as a literary or artistic work, for the term of the copyright. Accordingly, it is an infringement of copyright for a person to do, or authorise the doing of, one of the exclusive rights comprised in the copyright, for example to reproduce or publish a literary or artistic work without the licence or permission of the copyright owner. For copyright to exist in a particular subject matter it must fall within one of the categories recognised by the Copyright Act 1968 (Cth). Both published and unpublished works are protected by the Act. The categories of subject matter recognised by the Act comprise original literary, dramatic, musical and artistic works, and also sound recordings, cinematograph films, radio and television broadcasts, and published editions of works (that is, the typographical arrangement of works). No formal steps by way of registration are necessary for copyright protection: in other words, where copyright exists, it does so automatically.

Subject matter of copyright [8.40] The subject matter of copyright for the purposes of the Copyright Act 1968 (Cth) falls into two broad categories, namely: (a)

copyright in works, that is, original literary, dramatic, musical and artistic works, which are the concern of Pt III of the Act; and

(b)

copyright in subject matter other than works, that is, copyright in sound recordings (for example, CDs), cinematograph films, television and radio broadcasts, and published editions of works (that is, the typographical arrangement of a work). Copyright in such subject matter is dealt with in Pt IV of the Act and is considered separately at [8.750].

It is important to bear in mind that copyright is an incorporeal right, that is, a right to prevent an unauthorised reproduction or copying of one’s work, which is quite distinct from the general rights of property or ownership in the chattel, for example the book or painting, which is copied: Pacific Film Laboratories Pty Ltd v Commissioner of Taxation (1970) 121 CLR 154. In other words, copyright is quite separate from the physical object on which the ideas of the author or artist may be expressed. For example, when a person buys a painting that person will own the physical object, that is, the canvas, but not usually the copyright in the painting itself. Accordingly, in the absence of an assignment (that is, transfer) of copyright, or a licence or permission from the copyright 356 [8.30]

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owner (usually the artist), the purchaser may not reproduce the work, and if they do so, will be in breach of the artist’s copyright: Blackwell v Wadsworth (1982) 64 FLR 145.

Basis of copyright protection in works [8.50] The Copyright Act 1968 (Cth) deals separately with the question of the subsistence (that is, existence) of copyright in: (a)

unpublished works; and

(b)

published works.

Unpublished works [8.60] Copyright subsists in an unpublished original literary, dramatic, musical or artistic work if the author of the work was a qualified person at the time when the work was made: Copyright Act 1968 (Cth), s 32(1). A qualified person means, in essence, an Australian citizen or a person resident in Australia: s 32(4).

Published works [8.70] Copyright subsists in a published original literary, dramatic, musical or artistic work if: (a)

the first publication of the work took place in Australia; or

(b)

the author of the work was a qualified person at the time when the work was first published (as to the meaning of qualified person, see [8.60]: Copyright Act 1968 (Cth), s 32(2).

A literary, dramatic, musical or artistic work is deemed to have been published only if reproductions of the work have been supplied (whether by sale or otherwise) to the public: s 29(1).

Meaning of an original work [8.80] As we have seen, copyright may subsist in an unpublished or published original literary, dramatic musical or artistic work. This raises the question of what constitutes an original work. If the work in question originates from the author in the sense that it is the result of her or his skill, labour or judgment and is not copied from another, it is an original work for the purposes of copyright law: University of London Press Ltd v University Tutorial Press [1916] 2 Ch 601; Ladbroke (Football) Ltd v William Hill (Football) Ltd [1964] 1 WLR 273 (HL). Copyright may subsist in an original literary, dramatic, musical or artistic work: Copyright Act 1968 (Cth), s 32. These categories of “works” require further explanation.

Literary work [8.90] Literary work has a much broader meaning in copyright law than its conventional usage. The expression is not confined to a work of literature but [8.90] 357

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includes, inter alia, work which is expressed in writing irrespective of whether the quality or style is high: University of London Press Ltd v University Tutorial Press [1916] 2 Ch 601 at 608. In other words, one is not concerned with the question of the quality of a work in determining whether it is a literary work for the purposes of copyright law. The Copyright Act 1968 (Cth) defines “literary work” as including (s 10(1)): (a)

a table or compilation, expressed in words, figures or symbols; and

(b)

a computer program or compilation of computer programs.

The definition of literary work is not exhaustive. Accordingly, the court has to determine whether a particular work is a “literary work” and therefore whether copyright exists in it. For example, it has been held that copyright does not subsist in individual headlines of newspaper articles since they are generally too insubstantial to qualify for protection as literary works: Fairfax Media Publications Pty Ltd v Reed International Books Australia Pty Ltd (2010) 189 FCR 109.

Compilations [8.100] The definition of literary work includes, inter alia, a table or compilation. Consequently, it has been held that the following constituted a literary work for the purposes of the Copyright Act 1968 (Cth): (a)

football pool coupons (Ladbroke (Football) Ltd v William Hill (Football) Ltd [1964] 1 WLR 273 (HL));

(b)

trade catalogues of motorcycle parts (A-One Accessory Imports Pty Ltd v Off Road Imports Pty Ltd (1996) 65 FCR 478);

(c)

racing programs (Mander v O’Brien [1934] SASR 87); and

(d)

published lists of winning bingo numbers: Mirror Newspapers Ltd v Queensland Newspapers Pty Ltd [1962] Qd R 305.

Compilations are protected as “literary works” under the Copyright Act 1968, provided they are “original”: s 32(1), (2). Case study [8.110] Telstra published annual telephone directories consisting of an alphabetical listing of subscribers' names, addresses and telephone numbers. Another company, Desktop, copied the information in the Telstra directories onto CD-ROMs which they then sold. Desktop argued that there was no copyright in the Telstra directories because they lacked the necessary element of originality. The Full Federal Court held that copyright subsisted in Telstra’s telephone directories as original literary works and that copyright had been infringed by the substantial reproduction of the directories in Desktop’s CD-ROMs. The court held that as regards a compilation of factual material, the requirement of originality will be satisfied where sufficient labour and expense has been involved in collecting the information. It was not necessary to go further and 358 [8.100]

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establish some element of creativity by the compiler of the information: Desktop Marketing Systems Pty Ltd v Telstra Corporation Ltd (2002) 119 FCR 491.

[8.120] However, the later decision of the High Court in IceTV Pty Ltd v Nine Network Australia Pty Ltd (2009) 239 CLR 458 signals a departure from the approach in Desktop Marketing Systems Pty Ltd v Telstra Corporation Ltd (2002) 119 FCR 491 discussed at [8.110]. Case study [8.130] In IceTV Pty Ltd v Nine Network Australia Pty Ltd (2009) 239 CLR 458, the Channel Nine television station produced a Weekly Schedule of programs to be broadcast on Nine Network stations. The Weekly Schedules were produced from a database on Nine’s computer network and included particulars of the time and title of programs to be broadcast, additional programming information and synopses of the programs. The Weekly Schedules were distributed to licensees who combined the information with similar information provided by other broadcasters. IceTV accessed the aggregated guides and provided, via the Internet, a subscription-based electronic television guide containing program titles, times, duration and other details. Channel Nine claimed that IceTV had infringed its copyright by copying information from the aggregated guides. The High Court unanimously held (reversing the decision of the Full Federal Court) that IceTV had not infringed copyright since it had not reproduced a substantial part of Nine’s Weekly Schedules. The High Court emphasised that the role of copyright is to protect authors’ particular form of expression of facts and information, not the facts or information themselves. Since IceTV had conceded that copyright subsisted in Nine’s Weekly Schedules, the question of subsistence did not have to be determined by the High Court. However, the High Court did comment on the issue and noted that the reasoning in Desktop Marketing Systems Pty Ltd v Telstra Corporation Ltd (2002) 119 FCR 491, with respect to compilations, may be “out of line with the understanding of copyright law over many years” and that its emphasis on “‘labour and expense’ per se” should be treated “with some caution”: IceTV Pty Ltd v Nine Network Australia Pty Ltd (2009) 239 CLR 458 at [188] per Gummow, Hayne and Heydon JJ.

[8.140] Subsequently, in Telstra Corporation Ltd v Phone Directories Co Pty Ltd (2010) 194 FCR 142, an action by Telstra for alleged infringement of copyright in its White Pages and Yellow Pages directories failed on the ground that Telstra was unable to establish that copyright subsisted in the directories. The Full Federal Court held that to establish originality in a literary work, it is essential that the work originate from one or more human authors. In contrast, the directories could not be characterised as having originated from human

[8.140] 359

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authors because the compilation of the directories in the form in which they were published was primarily by an automated computerised process. 1

Computer programs [8.150] The definition of literary work set out at [8.90] expressly includes computer programs which are therefore protected by the Copyright Act 1968 (Cth). 2 A computer program is defined as meaning “a set of statements or instructions to be used directly or indirectly in a computer in order to bring about a certain result”: s 10(1). 3

Dramatic work [8.160] The essential character of a dramatic work is that it is intended to be represented or performed in some way, such as by acting or dancing. The Copyright Act 1968 (Cth) defines a dramatic work as including a choreographic show (for example, ballet or modern dance) or other dumb show: s 10. The definition also includes a scenario or script for a cinematograph film but does not include the film itself, since copyright in a film is the subject of a separate copyright: see [8.830]. 4

Musical work [8.170] There is no definition of “musical work” in the Copyright Act 1968 (Cth) and consequently, the ordinary meaning of the expression applies. 5

Artistic work [8.180] The Copyright Act 1968 (Cth) (s 10) defines an artistic work as meaning: a painting, sculpture, drawing, engraving or photograph, whether the work is of artistic quality or not;

(a)

1

2

3

4 5

See D Lindsay, “Protection of Compilations and Databases after IceTV: Authorship, Originality and the Transformation of Australian Copyright Law” (2012) 38 Monash University Law Review 17; J McCutcheon, “The Vanishing Author in Computer-Generated Works: A Critical Analysis of Recent Australian Case Law” (2012) 36 Melbourne University Law Review 917; J McCutcheon, “Curing the Authorless Void: Protecting Computer-Generated Works following IceTV and Phone Directories” (2013) 37 Melbourne University Law Review 46.

A complementary piece of legislation, the Circuit Layouts Act 1989 (Cth) provides special copyright style rights for original circuit layouts for integrated circuits (in essence, the design of a computer chip) called EL (that is, eligible layout) rights. EL rights are protected for 10 years after first commercial exploitation, a much shorter period of protection than under the Copyright Act 1968 (Cth) which is generally the life of the author plus 70 years. For the application of the Copyright Act 1968 (Cth) to computer programs, see Autodesk Inc v Dyason (1992) 173 CLR 330; Autodesk Inc v Dyason (No 2) (1993) 176 CLR 300; compare Data Access Corpn v Powerflex Services Pty Ltd (1999) 202 CLR 1. See also, P Knight, “Copyright in Databases and Computer Programs: Why is it so Hard to Understand?” (2010) 21 Australian Intellectual Property Journal 118. See S Bellingham, “Exploring the Boundaries of Copyright Subsistence in Dramatic Works” (2011) 22 Australian Intellectual Property Journal 106. See WPH Forrest, “Musicological and Legal Perspectives on Music Borrowing: Past Present and Future” (2011) 22 Australian Intellectual Property Journal 137.

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(b)

a building or a model of a building, whether the building or model is of artistic quality or not; or

(c)

a work of artistic craftsmanship whether or not mentioned in paragraph (a) or (b).

A number of the expressions used in the definition are further defined. For example, a “drawing” includes a diagram, map, chart or plan: s 10. Accordingly, copyright may subsist in an architect’s plan as an artistic work and if reproduced without permission will constitute an infringement of copyright: see, for example, Ancher Mortlock Murray & Woolley Pty Ltd v Hooker Homes Pty Ltd [1971] 2 NSWLR 278; Clarendon Homes (Aust) Pty Ltd v Henley Arch Pty Ltd (1999) 46 IPR 309. 6

Works of artistic craftsmanship [8.190] For an item to fall within category (c) of the definition of “artistic work” (see [8.180]), it must be a “work of artistic craftsmanship”. Basically, the expression would include all kinds of articles made by craftspersons, for example, jewellery, metal work, pottery, furniture and so on. However, beyond these obvious cases it can be difficult to determine whether a particular object constitutes a “work of artistic craftsmanship”. In its analysis of the expression in Burge v Swarbrick (2007) 232 CLR 336, the High Court said that the phrase is a composite one that needs to be construed as a whole. The issue is one for “objective determination by the court, assisted by admissible evidence” (at [63]). More particularly, the High Court said: “[D]etermining whether a work is ‘a work of artistic craftsmanship’ does not turn on assessing the beauty or aesthetic appeal of work or on assessing any harmony between its visual appeal and its utility. The determination turns on assessing the extent to which the particular work’s artistic expression, in its form, is unconstrained by functional considerations”: at [256].

Case study [8.200] In Burge v Swarbrick (2007) 232 CLR 336, the respondent, Swarbrick was a naval architect. In the course of designing a new class of yacht, he made a hand-built full-scale model of the hull and deck sections of the yacht. This was known as a “plug” and was the precursor for the creation of fibreglass moulds used for reproducing the design. A number of yachts were made from the moulds and sold to customers. The appellants obtained a hull and deck moulding of the yacht from a former employee of the respondent and intended to manufacture and sell the yachts. The respondent, Swarbrick (the plaintiff in the original proceedings), had contended, inter alia, that the “plug” hull and deck mouldings of the yacht were works of artistic craftsmanship and had obtained an injunction restraining the appellants from, in effect, copying his yacht design. 6

On indigenous works, see M Wyburn, “Protecting the Works of Indigenous Artists Under Copyright Law and at its Borders” (2012) 86 Australian Law Journal 829. [8.200] 361

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The High Court allowed the appellant’s appeal and held that the “plug” of the yacht did not constitute “a work of artistic craftsmanship”. The court said that the “plug” was primarily influenced by functional and utilitarian considerations such as how to make the yacht travel faster rather than by artistic or aesthetic considerations. Since the “plug” was not “a work of artistic craftsmanship”, it followed that the hull and deck moulds made from it were also not works of that character and the same applied to the hull and deck mouldings.

Copyright does not protect ideas as such [8.210] A basic principle of copyright law is that copyright does not protect ideas as such but only the particular form of expression in which they are embodied. This principle can be seen in Donoghue v Allied Newspapers Ltd [1938] 1 Ch 106: Case study [8.220] In Donoghue v Allied Newspapers Ltd [1938] 1 Ch 106, the plaintiff, a famous jockey, recounted his racing experiences to a journalist who wrote articles based on what the jockey had told him. The articles were published in a newspaper. The court rejected the plaintiff jockey’s argument that he was an author of the articles. In the course of his judgment Farwell J said (at 109): “This at any rate is clear beyond all question, that there is no copyright in an idea, or in ideas. A person may have a brilliant idea for a story, or for a picture, or for a play, and one which appears to him to be original; but if he communicates that idea to an author or an artist or a playwright, the production which is the result of the communication of the idea to the author or the artist or the playwright is the copyright of the person who has clothed the idea in form, whether by means of a picture, a play, or a book, and the owner of the idea has no rights in the product.”

[8.230] Once the idea has been reduced to some material form, for example in a novel, painting or drawing, then although copyright law will protect the formulated expression of the idea as seen, for example in the series of events or pattern of incidents set down in the novel, it does not protect the general idea or concept behind the work. The distinction between the general idea or concept behind a work that is not protected by copyright, and the formulated expression of the idea which is protected, is often difficult to draw. In Zeccola v Universal City Studios Inc (1982) 46 ALR 189, Lockhart and Fitzgerald JJ stated the basic position as follows (at 192): “In general, there is no copyright in the central idea or theme of a story or play, however original it may be; copyright subsists in the combination of situations, events and scenes which constitute the particular working out or expression of 362 [8.210]

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the idea or theme. If these are totally different, the taking of the idea or theme does not constitute an infringement of copyright.”

In that case it was held that an Italian film had gone beyond merely taking the basic idea of a killer shark terrorising a community but had copied many of the incidents from the book and script on which Jaws the film was based and therefore had prima facie infringed copyright. By way of contrast, the United Kingdom Court of Appeal held that the popular thriller, The Da Vinci Code, had not infringed copyright in an earlier non-fiction work, The Holy Blood and the Holy Grail, which had raised a number of the themes of historical conjecture which provided the background to The Da Vinci Code: Baigent v Random House Group Ltd [2007] All ER (D) 456; (2007) 72 IPR 195.

Ownership of copyright General principles [8.240] The general rule is that the author of a literary, dramatic, musical or artistic work is the owner of the copyright in the work: Copyright Act 1968 (Cth), s 35(2). The Act does not define author (except in relation to photographs) but the term means, in essence, the person who created the work in the sense of originating the particular form of literary, dramatic, musical or artistic expression: Donoghue v Allied Newspapers Ltd [1938] 1 Ch 106. Author in relation to a photograph taken after the commencement of the Act, that is, 1 May 1969, means the person who took the photograph: s 10.

Statutory exceptions [8.250] There are certain statutory exceptions to the general rule that the author of the work is the owner of the copyright in the work. These are as follows:

Works created in the course of employment [8.260] Where a literary, dramatic, artistic or musical work is made by the author “in pursuance of the terms of his or her employment” under a contract of service or apprenticeship, the employer is the owner of copyright in the work (Copyright Act 1968 (Cth), s 35(6)): Beloff v Pressdram Ltd [1973] 1 All ER 241. The expression “in pursuance of the terms of his or her employment” raises for consideration not only the question of whether the author was employed under a contract of service at the time a work is made but also “whether the relevant work is made in furtherance of the contract of employment with the employer. That is, did the employee make the work because the contract of employment expressly or impliedly required or at least authorised the work to be made”: Edsonic Pty Ltd v Cassidy (2010) 189 FCR 271 at [41] per Moore J. If the contract between the parties is not one of service (that is, if the relationship between the parties is not that of employer and employee) but a [8.260] 363

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contract for services, the author of the work will retain copyright in it subject to any contrary agreement between the parties. This can be of considerable importance because a good deal of copyright material is created by people who work on a freelance or consultancy basis, and in those circumstances they remain the owner of any copyright material they produce unless the contract provides otherwise: Oceanroutes (Aust) Pty Ltd v MC Lamond [1984] AIPC 90-134.

Special provisions for journalists [8.270] Under the Copyright Act 1968 (Cth) special provisions apply to journalists employed by newspapers and magazines. The provisions apply where a literary, dramatic or artistic work: (a)

is made by the author (that is, a journalist) under the terms of their employment by the proprietor of a newspaper, magazine or similar periodical under a contract of service; and

(b)

is made for the purpose of inclusion in a newspaper, magazine or similar periodical. In such a case, the author (that is, the journalist) is the owner of the copyright only in so far as the copyright relates to: (i)

reproduction of the work for the purpose of inclusion in a book; or

(ii)

reproduction of the work in the form of a hard copy facsimile (that is, a photocopy) made from a paper edition of an issue of the newspaper, magazine or similar periodical.

The proprietor of the newspaper or magazine is the owner of copyright for any other purpose: s 35(4). Case study [8.280] Three articles of a journalist employed by a metropolitan newspaper were photocopied by a company as part of its press-clipping and newsmonitoring service for distribution to its subscribers. It was held that the journalist was entitled to sue the company for infringement of his copyright in the articles he had written for the newspaper: De Garis v Neville Jeffress Pidler Pty Ltd (1990) 37 FCR 99. Although the case was decided under an earlier provision of the Copyright Act 1968 (Cth), the result would be the same under the current section.

[8.290] The newspaper proprietor owns copyright in the work of their employed journalists for inclusion of the work in some form of electronic transmission including, for example, computer networks, computer databases or pay-TV services. Self-employed or freelance journalists retain all rights in their works, subject to a provision of their contract to the contrary. 364 [8.270]

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Certain commissioned artistic works [8.300] The general principle in relation to commissioned works is that the author of the work, not the person who commissioned it, is the owner of the copyright unless there is agreement to the contrary: Blackwell v Wadsworth (1982) 64 FLR 145. However, the Copyright Act 1968 (Cth) makes special provision for ownership of copyright for certain commissioned artistic works, namely, photographs taken for a private or domestic purpose, portraits and engravings: s 35(5). The latter section provides, in effect, that where A makes an agreement with B for the taking of a photograph for a private or domestic purpose, the painting or drawing of a portrait, or the making of an engraving by B, A is the owner of any copyright in the work if the agreement is made for valuable consideration and the work is made in pursuance of the agreement. A photograph taken for a private or domestic purpose is defined as including a portrait of family members, a wedding party or children: s 35(7). The section further provides that if at the time the agreement was made A made known to B, expressly or by implication, the purpose for which the work was required, B is entitled to restrain the doing of any act comprised in the copyright in the work otherwise than for that purpose: s 35(5). One effect is that a commercial photographer may license future uses of their photographs where such photographs are not commissioned for a private or domestic purpose. Apart from these limited exceptions, the person who was commissioned to do the work will retain copyright in it and accordingly will be entitled to use the work for other purposes: Cope Allman (Marrickville) Ltd v Farrow (1984) 3 IPR 567. The provisions may be excluded or modified by agreement.

Rights comprised in copyright and infringement [8.310] Copyright comprises certain exclusive rights in relation to specified subject matter. In the case of a literary, dramatic or musical work, the Copyright Act 1968 (Cth), s 31(1)(a) provides that copyright is the exclusive right to do all or any of the following acts: (i)

to reproduce the work in a material form;

(ii)

to publish the work;

(iii)

to perform the work in public;

(iv)

to communicate the work to the public;

(v)

to make an adaptation of the work;

(vi)

to do, in relation to a work that is an adaptation of another work, any of the aforementioned acts.

Copyright in the case of an artistic work is the exclusive right to do all or any of the following acts (s 31(1)(b)): [8.310] 365

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(i)

to reproduce the work in a material form;

(ii)

to publish the work;

(iii)

to communicate the work to the public.

The Copyright Act 1968 also includes a commercial rental right in respect of computer programs (s 31(1)(d)), and literary, musical or dramatic works reproduced in a sound recording (for example, a CD or tape): s 31(1)(c) (see further, [8.420]). Copyright in a literary, dramatic, musical or artistic work is infringed by a person who, not being the owner of the copyright (and without the licence of the owner), does or authorises the doing in Australia of any act comprised in the copyright: s 36(1). The nature of the exclusive rights of the copyright owner set out above requires further explanation.

Reproduction in a material form [8.320] Copyright protects against unauthorised reproduction of a work in a material form: Copyright Act 1968 (Cth), s 31(1)(a)(i), (b)(i). The infringing act need not be done in relation to the whole of the work: it is sufficient if it is done in relation to a substantial part of the work: s 14(1). In other words, to establish an infringement of copyright it is not necessary to show, for example, that the whole of the work was copied, it is sufficient that a substantial part of the work was reproduced. What constitutes a substantial reproduction in any particular case is a question of fact to be determined having regard to all the circumstances. The most important factor is the quality of what is taken rather than the quantity: Ladbroke (Football) Ltd v William Hill (Football) Ltd [1964] 1 WLR 273 (HL). For example, to copy a few bars of music of a popular song may constitute a substantial reproduction where the bars copied constitute the main theme of the song: Hawkes & Son (London) Ltd v Paramount Film Service Ltd [1934] 1 Ch 593. In EMI Songs Australia Pty Ltd v Larrikin Music Publishing Pty Ltd (2011) 191 FCR 444 the Full Federal Court held that the inclusion of two bars of the air or theme of the musical round “Kookaburra Sits in the Old Gum Tree” in a flute riff in the appellants’ recordings of the song “Down Under” constituted an infringement of the respondent’s copyright in the “Kookaburra” round. The exclusive right being considered is the exclusive right of the copyright owner to reproduce the work in a material form. Reproduction in the present context essentially means copying, and to establish infringement of copyright on this ground requires proof of: (a)

a sufficient degree of objective similarity between the plaintiff’s and the defendant’s work, that is, the defendant must have produced a work which closely resembles the plaintiff’s; and

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a causal connection between the two works, that is, the defendant’s work must be derived directly or indirectly from the plaintiff’s copyright work.

The general position was succinctly stated in the High Court by Gibbs CJ in SW Hart & Co Pty Ltd v Edwards Hot Water Systems (1985) 159 CLR 466 at 472, as follows: “The notion of reproduction, for the purposes of copyright law, involves two elements – resemblance to, and actual use of, the copyright work, or, to adopt the words which appear in the judgment of Willmer LJ in Francis Day & Hunter Ltd v Bron [1963] Ch 587 at 614, ‘a sufficient degree of objective similarity between the two works’ and ‘some causal connection between the plaintiffs’ and the defendants’ work’.”

If the defendant can show that, despite the similarity between the two works, he or she was not aware of, or did not have access to, the plaintiff’s work, there will have been no infringement of the plaintiff’s copyright: Francis Day & Hunter Ltd v Bron [1963] Ch 587.

Reproduction where sound recording or film made of the work [8.330] A literary, dramatic, musical or artistic work is deemed to have been reproduced in a material form if a sound recording or cinematograph film is made of the work (Copyright Act 1968 (Cth), s 21(1)); for example, where the words or music of a song are used in making a record of the song without the licence of the copyright owner there will be an infringement of copyright.

Reproduction in a digitised form [8.340] A copyright owner’s exclusive right to reproduce a work now includes, in effect, the right to digitise the work, that is, to convert it into or from a digital or other electronic machine-readable form: Copyright Act 1968 (Cth), s 21(1A).

Reproduction in three-dimensional form [8.350] Copyright in a two-dimensional artistic work is deemed to have been reproduced if a representation of it is produced in a three-dimensional form, or vice versa: Copyright Act 1968 (Cth), s 21(3). For example, the construction of a building by making unauthorised use of an architect’s plans would constitute a reproduction of the plan (the two-dimensional work) in the form of the building (the three-dimensional version of the two-dimensional artistic work) and hence infringement of the architect’s copyright in her or his plans: Ancher Mortlock Murray & Woolley Pty Ltd v Hooker Homes Pty Ltd [1971] 2 NSWLR 278. Similarly, to manufacture a truck trailer which substantially reproduces without permission another company’s sketches and drawings of a trailer constitutes an infringement of copyright in the sketches and drawings: Vawdrey Australia Pty Ltd v Kreuger Transport Equipment Pty Ltd (2009) 261 ALR 269. [8.350] 367

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Publication [8.360] An author has the exclusive right to publish her or his work: Copyright Act 1968 (Cth), s 31(1)(a)(ii), (b)(ii). The High Court has held that to publish in this context means to make public in Australia that which has not previously been made public: Avel Pty Ltd v Multicoin Amusements Pty Ltd (1990) 171 CLR 88.

Public performance [8.370] Copyright in a literary, dramatic or musical work includes the exclusive right to control public performance of the work: Copyright Act 1968 (Cth), s 31(1)(a)(iii). Basically, a performance of a work given to members of the public is a performance in public unless it is shown to be private or domestic in character. For example, in Australasian Performing Right Assoc v Canterbury-Bankstown League Club Ltd [1964] NSWR 138, it was held that music played by a dance band at a sporting and social club for members and their guests constituted a performance in public and hence an infringement of copyright of the performing rights in the music being played. The term performance includes any method of visual or aural presentation: s 27(1). The playing of music over a loudspeaker system in a record shop was held to constitute a performance in public of the music played (Performing Right Society Ltd v Harlequin Record Shop Ltd [1979] 1 WLR 851), as was the playing of music over car radios displayed for sale in a chain of retail automotive equipment shops: Australasian Performing Right Assoc Ltd v Tolbush Pty Ltd [1986] 2 Qd R 146. Case study [8.380] A musical work was incorporated in an instructional video cassette and played to 11 employees of the defendant bank at one of its branches prior to opening for business. It was held that this constituted a public performance of the musical work which, since it was unauthorised, constituted an infringement of copyright: Australasian Performing Right Assoc Ltd v Commonwealth Bank of Australia (1992) 40 FCR 59.

Australasian Performing Right Association (APRA) [8.390] Copyright in the performing rights of most popular music played in Australia is usually assigned to the Australasian Performing Right Association (APRA) and, accordingly, permission should be obtained from APRA to perform such music in public which will usually be granted on payment of the appropriate licence fee. The revenue collected by APRA is distributed to the members of the Association comprising composers and publishers of musical works.

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Communication of the work to the public [8.400] The Copyright Amendment (Digital Agenda) Act 2000 (Cth) introduced a broadly-based, technology neutral right of communication to the public. The right is an exclusive right in literary, dramatic, musical and artistic works (Copyright Act 1968 (Cth), ss 31(1)(a)(iv) and 31(1)(b)(iii)), and sound recordings, films and broadcasts: ss 85(1)(c), 86(c) and 87(c), respectively. “Communicate” means to make available online or electronically transmit (whether over a path, or a combination of paths, provided by a material substance or otherwise) a work or other subject matter: s 10(1). The exclusive right of communication to the public replaces and extends the former technology-specific broadcasting right that was limited to wireless broadcasts: it also includes cable transmissions. The right covers making copyright material available online, for example uploading material onto the Internet. The expression “to the public” is defined as meaning to the public within or outside Australia: s 10(1).

Adaptations [8.410] The right to make an adaptation of a literary, dramatic or musical work is one of the exclusive rights conferred on the copyright owner: Copyright Act 1968 (Cth), s 31(1)(a)(vi). Adaptation means a dramatisation of a non-dramatic literary work; a non-dramatic version of a literary work in a dramatic form; a version of a computer program; a translation; a pictorial version of a literary work, and in the case of a musical work an arrangement or transcription of the work: s 10. The copyright owner has the same exclusive rights in the adaptation as he or she had in the original work (s 31(1)(a)(vii)), that is, the right to reproduce, publish, perform in public and communicate the work to the public.

The commercial rental right [8.420] A commercial rental right only applies to: (a)

a sound recording (for example, a CD) (Copyright Act 1968 (Cth), s 85, see [8.760]);

(b)

a literary, musical or dramatic work reproduced in a sound recording (s 31(1)(c)); and

(c)

a computer program: s 31(1)(d).

The nature of the exclusive right is expressed as a right to enter into a commercial rental arrangement: s 31(5). In essence, the owner of copyright in a sound recording, a work embodied in the recording, or in a computer program, has the exclusive right to rent out the sound recording or computer program for consideration in the course of a business. The Federal Court has rejected the contention that a “movie” embodied in a DVD is, in essence, a computer program and therefore subject to the copyright [8.420] 369

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owner’s right to control commercial rental arrangements in respect of computer programs: Australian Video Retailers Association Ltd v Warner Home Video Pty Ltd (2001) 114 FCR 324.

Authorising infringement of copyright [8.430] Infringement of copyright occurs not only by doing an act comprised in the copyright without the licence of the copyright owner but also by authorising such act: Copyright Act 1968 (Cth), s 36(1). What amounts to an authorisation was considered by the High Court in the University of New South Wales v Moorhouse (1975) 133 CLR 1: Case study [8.440] In University of New South Wales v Moorhouse (1975) 133 CLR 1, a graduate of the University of New South Wales made two photocopies of a story on a photocopying machine in the university library. In making the two photocopies of the same story, the graduate had infringed the copyright in the work. However, the proceedings were brought by the author and the publishers not against the graduate but against the university on whose photocopying machines the infringement had occurred. The High Court held that the university had “authorised” the infringement of copyright. The reason was that the university had provided the books and the photocopying machine and taken inadequate steps to warn potential users against possible infringement of copyright. The High Court gave a broad interpretation to the expression “authorises” as meaning sanction, approve or countenance.

[8.450] To establish infringement of copyright by authorisation, some connection should exist between the person alleged to have authorised the infringing act and the infringer. That is, the person alleged to have authorised another to commit an infringing act must have had some form of control over the latter at the time the infringing act occurred or, alternatively, have been responsible for placing in the other’s hands materials which by their nature would almost invariably be used for the purpose of an infringing act: RCA Corp v John Fairfax & Sons (1981) 34 ALR 345; WEA International Inc v Hanimex Corp Ltd (1987) 17 FCR 274. The Copyright Act 1968 (Cth) requires that in determining the issue of authorisation, the matters that must be taken into account include: (a)

the extent (if any) of the person’s power to prevent the doing of the act concerned;

(b)

the nature of any relationship existing between the person and the person who did the act concerned; 7 and

7

B Scott, “Authorisation under Copyright Law and ’the Nature of any Relationship’” (2011) 22 Australian Intellectual Property Journal 172.

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whether the person took any reasonable steps to prevent or avoid the doing of the act, including whether the person complied with any relevant industry codes of practice: s 36(1A).

Importation and sale of infringing copies [8.460] So far we have been concerned with the infringement of copyright by the doing, or authorising of doing, of one or more of the exclusive rights of the copyright owner set out in Copyright Act 1968 (Cth), s 31, for example, reproducing the work in a material form without the licence (that is, consent) of the copyright owner. In addition, the Copyright Act 1968 provides that certain other acts also constitute an infringement of copyright. These are sometimes referred to as secondary infringements as distinct from primary infringements under s 31. These other activities involving an infringement of copyright are: (a) (b)

importing articles which infringe copyright: under s 37; and selling or otherwise dealing in articles which infringe copyright: under s 38.

In contrast with infringement of copyright in respect of the owner’s exclusive rights set out in s 31, infringement of copyright by way of importation and/or sale of “infringing articles” under ss 37 and 38 require proof of knowledge on the part of the defendant. That is, there is no liability for the importation and/or sale of the “infringing articles” unless the defendant knew or ought reasonably to have known that the articles being imported or sold infringed copyright.

Importation [8.470] Copyright in a literary, dramatic, musical or artistic work is infringed by a person who, without the licence of the owner of the copyright, imports an article into Australia for sale, hire or other trade purpose, if the importer knew, or ought reasonably to have known, that if the importer had made the article in Australia it would have constituted an infringement of copyright: Copyright Act 1968 (Cth), s 37. Under this provision if the article imported is an unauthorised reproduction or pirate copy of the plaintiff copyright owner’s work, and the importer knew this, then the importer will infringe copyright by importing the pirate copy. Case study [8.480] The respondent company imported carpets from a factory in Vietnam. The carpets reproduced five Aboriginal artworks and substantially reproduced three others, copyright in which was owned by the applicants. The Federal Court held that the company had infringed the applicants’ copyright by importing the carpets. Thus, the managing director of the respondent company knew, or ought reasonably to have known, that had he [8.480] 371

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made the carpets in Australia that making would have constituted an infringement of copyright. The managing director’s knowledge in that respect was imputed to the company, that is both the managing director and the company were held liable for infringement of copyright: Milpurrurru v Indofurn Pty Ltd (1994) 54 FCR 240.

Parallel importation [8.490] A further important effect of the importation provision is that the article imported might be lawfully made and purchased overseas, that is, be a genuine work, but its importation into Australia will constitute an infringement of the Australian copyright in the work if the making of it in Australia by the importer would have infringed copyright and the importer knew this. The effect of the provision on the importation of genuine goods in which copyright subsists can be seen in the leading decision of the High Court in Interstate Parcel Express Co Pty Ltd v Time-Life International (Nederlands) BV (1977) 138 CLR 534: Case study [8.500] In Interstate Parcel Express Co Pty Ltd v Time-Life International (Nederlands) BV (1977) 138 CLR 534, Time Incorporated owned the copyright in a series of cookery books. Time Incorporated granted to its affiliate company, Time-Life, an exclusive licence to distribute the books. Angus & Robertson, a Sydney bookseller, wanted to obtain the books to sell in Australia. The bookseller found that it was able to purchase the books by wholesale in America and sell the books cheaper by retail than the price at which it could buy them at wholesale through Time-Life’s authorised distribution channels in Australia. Accordingly, the bookseller purchased 8,400 copies of the book from a Californian book wholesaler. After the sale of the first consignment, Angus & Robertson ordered a further 8,400 copies from the Californian book wholesaler having been warned by Time-Life that its importation and sale of the books was in breach of copyright. Time-Life sought an interlocutory injunction to restrain the bookseller from selling any of the second consignment of books. The High Court held that the importation and sale of the books by Angus & Robertson infringed Time-Life’s copyright under ss 37 and 38 of the Copyright Act 1968 (Cth). The Court rejected the bookseller’s argument that the sale of the books in the US without restriction on their resale in Australia, implied a licence for their importation into this country. In the Court’s view only a positive licence from the copyright owner or exclusive licensee would prevent infringement of copyright (under ss 37 and 38) by the importer.

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Relaxation of the restrictions on parallel importation [8.510] In view of the potential anti-competitive effects of the copyright importation provisions, there has been a gradual relaxation of the restrictions on parallel importation by a series of statutory amendments to the importation provisions.

1. Partial relaxation in the case of books [8.520] Following amendments to the Copyright Act 1968 (Cth) in 1991, there has been a partial relaxation of the copyright restrictions on the parallel importation of books. Broadly, books can be imported from overseas without the licence or permission of the copyright owner in the following situations (s 44A): 1.

Where a book is first published outside Australia and not published in Australia within 30 days, it is not an infringement of copyright to import non-pirated copies of the book for commercial purposes. In such a case the right of the copyright owner to control the importation of the book into Australia is permanently lost.

2.

Where a copyright owner does first publish a book in Australia, or makes copies available within 30 days of first publication overseas, the copyright owner will lose the right to prevent importation by another person to the extent that the copyright owner is unable to meet an order for supply of the book within 90 days.

3.

A single copy of a book may be imported for a customer who does not intend to use the book for commercial purposes.

4.

Multiple copies of books may be imported for a non-profit library. 8

2. Removal of restrictions on parallel importation by reliance on labels and other copyright material accompanying a product [8.530] An overseas copyright owner was formerly able to control the distribution of goods in Australia through its own distribution channels by relying on copyright in a label or packaging of the goods. For example, in RA & A Bailey & Co Ltd v Boccaccio Pty Ltd (1986) 4 NSWLR 701, the overseas manufacturer of the liqueur “Bailey’s Original Irish Cream” was able to prevent the parallel importation of the liqueur by relying on copyright in the distinctive label on the bottle. However, this practice no longer applies following amendment of the Copyright Act 1968 (Cth). It is now provided that it is not an infringement of copyright in a work (for example, an artistic work), a copy of which is, or is on, 8

At the time of writing, removal of the remaining restrictions on the parallel importation of books was once again under consideration by the Commonwealth Government. See generally, A Duke and ME Taylor, “Parallel import restrictions: Core intellectual property rights or unjustified restraints on trade?” (2015) 22 Competition & Consumer Law Journal 254. [8.530] 373

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or embodied in, a non-infringing accessory (for example, a label) to an article, to import the accessory with the article: s 44C. The definition of “accessory” in s 10(1) is wide and includes labels and packaging and also written instructions, warranties and other information provided with an article and instructional records and films. A “non-infringing accessory” is, in essence, an “accessory” made with the permission of the owner of the copyright in the accessory material: s 10(1). If the importation of the accessory is not an infringement of copyright in a work, subsequent commercial dealings with the accessory (for example, sale) are also not infringing acts: s 44C(2). Case study [8.540] The respondent imported into Australia from the United States for the purposes of sale genuine Polo Lauren garments. The garments bore the well-known polo player logo which is a representation of a polo player swinging a mallet while astride a cantering polo pony. The garments had been acquired at various trade fairs in the United States where the previous season's fashions could be purchased at a substantial discount. The appellant sought to prevent the respondent's importation and sale of the garments relying on its copyright in the logo as an artistic work. The Full Court of the Federal Court upheld the decision at first instance that the logo was a label incorporated into the surface of the garments and therefore an “accessory” 9 and that, in consequence, the respondent could rely on s 44C of the Copyright Act 1968 (Cth) as a defence to the appellant’s action: Polo/Lauren Company LP v Ziliani Holdings Pty Ltd (2008) 173 FCR 266.

3. Removal of restrictions on parallel importation of computer software [8.550] The Copyright Amendment (Parallel Importation) Act 2003 (Cth) enacted provisions allowing the parallel importation of legitimate computer software including computer games: see Copyright Act 1968 (Cth), s 44E.

4. Removal of restrictions on parallel importation of certain electronic items [8.560] The Copyright Amendment (Parallel Importation) Act 2003 (Cth), referred to in the previous section, removes the restrictions on the parallel importation of non-infringing copies of an “electronic literary or musical item”. The latter phrase is defined (in s 10) to mean a book, a periodical publication or sheet music in electronic form. As will be discussed at [8.1000], the former restrictions on the parallel importation of sound recordings (for example, CDs) have been removed in recent years. 9

The Copyright Act 1968 (Cth), s 10(1) provides: “accessory, in relation to an article, means one or more of the following: (a) a label affixed to, displayed on, incorporated into the surface of, or accompanying, the article” (emphasis added).

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Sale [8.570] Copyright in a work is infringed by a person who sells or hires an article in Australia if the person knew, or ought reasonably to have known, that the making of the article constituted an infringement of the copyright or, in the case of an imported article, would, if the article had been made in Australia by the importer, have constituted such an infringement: Copyright Act 1968 (Cth), s 38. Accordingly, if a retailer sells articles in which copyright subsists knowing that the articles are pirate copies, or that their importation into Australia infringed copyright, the retailer will be liable for infringement of copyright in selling the infringing articles.

Proof of knowledge [8.580] The provisions as to importation and sale outlined at [8.470] and [8.570] require proof of knowledge on the part of the defendant, that is, that the defendant knew, or ought reasonably to have known, of the necessary facts which would suggest a breach of copyright was being committed: Raben Footwear Pty Ltd v Polygram Records Inc (1997) 75 FCR 88.

Statutory defences to an action for infringement [8.590] The Copyright Act 1968 (Cth) contains a number of statutory defences that are available to a defendant who would otherwise be liable for infringement of copyright.

Fair dealing [8.600] The most important statutory defence is that of fair dealing for certain specific purposes. The Copyright Act 1968 (Cth) provides that a fair dealing with a literary, dramatic, musical or artistic work does not constitute an infringement of copyright where the fair dealing was for the purpose of: (a)

research or study (s 40);

(b)

criticism or review (s 41);

(c)

parody or satire (s 41A);

(d)

the reporting of news (s 42); or

(e)

the giving of professional advice by a legal practitioner, patent attorney or trade marks attorney: s 43(2).

The expression “fair dealing” is not defined by the Copyright Act 1968 (except in relation to copying a work for the purpose of research or study (see [8.650])) and, accordingly, the question of what constitutes a fair dealing requires a careful assessment of the nature and extent of the use of the work in the circumstances of each case.

[8.600] 375

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Case study [8.610] In Hubbard v Vosper [1972] 2 QB 84, the defendant’s book, entitled the Mindbenders, was highly critical of the cult of Scientology. The book contained substantial extracts from the plaintiff’s writings on the subject. The United Kingdom Court of Appeal held that the defence of fair dealing for the purpose of criticism or review had been made out on the particular facts.

[8.620] On the meaning of fair dealing Lord Denning MR said in Hubbard v Vosper [1972] 2 QB 84 at 94: “It is impossible to define what is ‘fair dealing’. It must be a question of degree. You must consider first the number and extent of the quotations and extracts. Are they altogether too many and too long to be fair? Then you must consider the use made of them. If they are used as a basis for comment, criticism or review, that may be fair dealing. If they are used to convey the same information as the author for a rival purpose, that may be unfair. Next, you must consider the proportions. To take long extracts and attach short comments may be unfair. But, short extracts and long comments may be fair. Other considerations may come to mind also. But, after all is said and done, it must be a matter of impression.”

Case study [8.630] An interlocutory injunction was sought to restrain the intended publication by certain newspapers of extracts from a book containing classified government documents concerning Australian foreign policy. The defence of fair dealing was rejected by the High Court since it was clear that the primary intention was publication of the documents themselves, rather than the publication of extracts for the purpose of criticism or review, or the reporting of news: Commonwealth v John Fairfax & Sons Ltd (1980) 147 CLR 39.

[8.640] In De Garis v Neville Jeffress Pidler Pty Ltd (1990) 37 FCR 99 it was held that to photocopy articles from newspapers for distribution to subscribers as part of a press-clipping and news monitoring service did not constitute a fair dealing with the material copied for the purposes of research or study, criticism or review, or for the reporting of news and therefore constituted an infringement of the copyright of those who had written the articles.

Fair dealing – copying for research or study [8.650] The Copyright Act 1968 (Cth) sets out certain criteria to be taken into account in determining whether the copying of a literary, dramatic, musical or artistic work constitutes a fair dealing for the purpose of research or study. These include the purpose and character of the dealing; the nature of the work or adaptation; the possibility of obtaining the work or adaptation within a reasonable time at an ordinary commercial price; the effect of the dealing upon the potential market for, or value of, the work or adaptation; and where part only of the work or adaptation is copied, the amount and substantiality of the part copied in relation to the whole: s 40(2). 376 [8.610]

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Reproduction for research or study of all or part of an article in a periodical publication is taken to be a fair dealing (s 40(3)); this does not apply if another article in the publication is reproduced for different research or a different course of study: s 40(4). Further, reproduction for research or study of not more than a “reasonable portion” of a work is taken to be a fair dealing: “reasonable portion” is 10 per cent of a published edition of a work (except a computer program) provided it is not less than 10 pages, or one chapter of the work: ss 40(5) and 10(2). The reproduction of part of a literary or dramatic work in electronic form will be taken to contain only a reasonable portion of the work if the number of words copied does not exceed 10 per cent of the number of words in the work or if the work is divided into chapters, a single chapter of the work: s 40(5) and s 10(2A).

Educational copying of broadcast programs [8.660] The Copyright Act 1968 (Cth), Pt VA (ss 135A – 135ZA) provides a statutory licence scheme for educational institutions to copy off-air television and radio broadcasts. The scheme allows a participating institution to copy for educational purposes any program without infringing the broadcasting copyright, or the copyright in any subject matter included in the broadcast, provided the institution complies with certain requirements including the payment of equitable remuneration to the copyright owners. Copyright owners exercise their rights through a single collecting society approved by the Attorney-General.

Educational photocopying [8.670] The Copyright Act 1968 (Cth), Pt VB (ss 135ZB – 135ZZH) provides for the photocopying of works for educational purposes subject to a number of limitations and compliance with certain formalities.

Format-shifting [8.680] The Copyright Act 1968 (Cth) (following amendment by the Copyright Amendment Act 2006 (Cth)) permits a person who has purchased a legitimate copy of some categories of copyright material to make a copy in a different format. The format-shifting provisions apply to four categories of copyright material and provide that it is permissible to copy, without infringing copyright: (a)

the content of a book, newspaper or periodical into another format (for example, this allows a person to scan an article from a newspaper they have purchased to save on their computer) (s 43C);

(b)

a photograph from hardcopy into electronic format, or from electronic format into hardcopy form (47J); [8.680] 377

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(c)

a sound recording from a CD, tape or record to any other format (for example, this allows a person to store their personal music collection recorded on CDs, audio tapes or vinyl records in the memory of an MP3 player or home entertainment personal computer) (s 109A); and

(d)

a film from video to electronic format: s 110AA.

The provisions allowing format shifting referred to above are subject to a number of conditions: (a)

a person is only able to copy for their own “private and domestic use”;

(b)

a person can only copy from a legitimately purchased or owned original, that is, it is not permissible to copy from a borrowed or pirated copy;

(c)

the provisions do not apply if a copy is sold, let for hire, offered for sale or hire, or distributed for trade or other purposes, or if the owner of the original item disposes of it to another person;

(d)

the copy may be lent to a member of the lender’s family or household for the member’s private and domestic use; and

(e)

a person can only make one copy in any given format.

Other statutory exceptions to infringement [8.690] The Copyright Act 1968 (Cth) contains other provisions delineating acts that do not constitute an infringement of copyright. These include: (a)

performance in the course of educational instruction (s 28);

(b)

performance of works on for example, a radio or television set, at premises where persons reside or sleep (s 46);

(c)

public reading or recitation of literary or dramatic works (s 45); and

(d)

the making of a painting, drawing or photograph or inclusion in a film or television broadcast of a sculpture situated in a public place or of a building: ss 65 – 67.

Copying Acts of Parliament or judgments [8.700] The Copyright Act 1968 (Cth) provides that it is not an infringement of copyright, or any prerogative right or privilege of the Crown, for an individual to make one copy for herself or himself or another of certain prescribed works by reprographic reproduction: s 182A. These works include the whole or part of a federal, State or Territory Act, or a judgment, order or award of a court or tribunal. Copyright in a literary, dramatic, musical or artistic work is not infringed by anything done for the purposes of a judicial proceeding or of a report of a judicial proceeding: s 43(1). 378 [8.690]

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Statutory licences and the manufacture of records of musical works [8.710] The Copyright Act 1968 (Cth) contains provisions for the grant of statutory licences for the manufacture of recordings of musical works: the relevant provisions are to be found in ss 54 – 64 and s 215 and in the Copyright Regulations 1969 (Cth). The royalty payable in respect of a record is the amount agreed between the manufacturer and the owner of copyright in the work or, if the parties cannot agree, the amount determined by the Copyright Tribunal of Australia or, if there is no agreement or Tribunal determination, the royalty is 6.25 per cent of the retail selling price of the record: Copyright Act 1968 (Cth), s 55. The statutory licence only permits the making of records of musical works (and associated lyrics): it does not permit the copying of sound recordings of musical works made in or imported into Australia.

Duration of copyright in works Literary, dramatic and musical works [8.720] The general rule is that copyright in a literary, dramatic or musical work subsists for 70 years after the end of the calendar year in which the author died: Copyright Act 1968 (Cth), s 33(2). However, if, before the death of the author, the work or an adaptation of it has not been published, performed in public, broadcast, or offered for sale to the public in the form of records, any copyright subsisting in the work will continue to subsist for 70 years after the end of the calendar year in which one of those events happens for the first time: s 33(3).

Artistic works [8.730] Copyright in artistic works subsists for 70 years after the end of the calendar year in which the author died: Copyright Act 1968 (Cth), s 33(2). The term of copyright in engravings published during the life of the author is the same as for other artistic works, that is, the life of the author plus 70 years. However, if the engraving has not been published before the death of the author, then copyright continues to subsist in it for 70 years after the end of the calendar year in which the engraving is first published: s 33(5).

Works of joint authorship [8.740] In the case of works of joint authorship, insofar as the duration of copyright is dependent on the life of the author, the period of protection runs from the death of the last surviving joint author: Copyright Act 1968 (Cth), s 80. The Act contains special provisions where a work of joint authorship is first published under two or more names of which one or more (but not all) are pseudonyms: see s 81. [8.740] 379

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Copyright in subject matter other than works [8.750] While Pt III of the Copyright Act 1968 (Cth) deals with copyright in original works, Pt IV concerns copyright in subject matter other than works, that is: (a)

sound recordings (including CDs, tapes and records);

(b)

cinematograph films (including movies);

(c)

television and sound broadcasts; and

(d)

published editions of works (that is, the typographical arrangement of a work).

Part IV contains provisions dealing with the subsistence, ownership and duration of copyright in respect of each of the categories referred to above. The nature of the exclusive rights in each of those categories is also set out separately as discussed below. Copyright is infringed by a person who, not being the owner of the copyright (and without the licence of the owner), does or authorises the doing in Australia of any act comprised in the copyright: s 101(1). In determining the issue of authorisation, the matters to be taken into account include: (a)

the extent (if any) of the person’s power to prevent the doing of the act concerned;

(b)

the nature of any relationship existing between the person and the person who did the act concerned;

(c)

whether the person took any reasonable steps to prevent or avoid the doing of the act, including whether the person complied with any relevant industry codes of practice: s 101(1A).

The High Court held in Roadshow Films Pty Ltd v iiNet Ltd (2012) 248 CLR 42 that the respondent internet service provider (ISP) was not liable for authorising infringements of copyright by its customers using its facilities to make the appellants’ films available online to be downloaded by others through the use of the BitTorrent peer-to-peer file-sharing system. The ISP had no power to prevent the infringements and could take no reasonable steps to prevent or avoid the infringements. Copyright in Pt IV subject matter (sound recordings, cinematograph films, television and sound broadcasts and published editions of works) is in addition to, and independent of, any copyright subsisting in a work (for example, a literary or musical work under Pt III) embodied in the sound recording, film, broadcast or edition: s 113(1). Each of the categories of subject matter in which copyright may subsist by virtue of Pt IV is discussed in turn.

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1. Sound recordings [8.760] A sound recording as defined by the Copyright Act 1968 (Cth) (s 10) includes, for example, CDs and tapes of music.

Subsistence of copyright [8.770] Copyright subsists in a sound recording provided one of the following factors exists (Copyright Act 1968 (Cth), s 89): (a)

the maker was a qualified person at the time when the recording was made;

(b)

the recording was made in Australia; or

(c)

the first publication of the recording took place in Australia (or in a country to which the Act applies).

Qualified person means an Australian citizen, an Australian protected person, a person resident in Australia, or a body corporate incorporated under a law of the Commonwealth or of a State: s 84. A sound recording is deemed to have been published if, but only if, records embodying the recording or a part of the recording have been supplied (whether by sale or otherwise) to the public: s 29(1)(c).

Exclusive rights [8.780] Copyright in a sound recording is the exclusive right to: (a)

make a copy of the sound recording;

(b)

cause the recording to be heard in public;

(c)

communicate the recording to the public; and

(d)

enter into a commercial rental arrangement in respect of the recording: Copyright Act 1968 (Cth), s 85(1).

The exclusive right to communicate the recording to the public replaces and extends the former exclusive right to broadcast the recording: as to the meaning of “communicate” and “to the public”, see [8.400]. It will be observed that the owner of copyright in a sound recording has an exclusive right to enter into a “commercial rental arrangement”, that is, to rent out the CD for instance. As to the meaning of “commercial rental arrangement”, see [8.420].

Ownership of copyright [8.790] The maker of a sound recording is the owner of copyright in the recording: Copyright Act 1968 (Cth), s 97(2). However, where the maker of the sound recording made it under contract for some other person, then the latter (that is, the party commissioning the making of the recording) is the owner of the copyright in the absence of any agreement to the contrary: s 97(3). [8.790] 381

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Statutory licences [8.800] The Copyright Act 1968 (Cth) provides for statutory licences to play sound recordings in public and to broadcast them: ss 108, 109. For example, it is not an infringement of copyright in a published sound recording for a person to cause it to be heard in public, or to broadcast it, if the required royalties are paid and the recording has been published in Australia; the royalty is such amount as the parties agree upon or, in default of agreement, the amount determined by the Copyright Tribunal of Australia (ss 108, 151; ss 109, 152): see Reference by Australasian Performing Right Assoc Ltd; Re Australian Broadcasting Corp (1985) 5 IPR 449.

Exception to infringement: format-shifting [8.810] The Copyright Act 1968 (Cth), s 109A permits the owner of a sound recording, for example a CD, to make a copy of the recording for private and domestic use in a different format, for example on an MP3, subject to certain conditions: see [8.680].

Duration of copyright [8.820] Copyright subsists in a sound recording for 70 years after the end of the calendar year in which the recording is first published: Copyright Act 1968 (Cth), s 93.

2. Cinematograph films [8.830] The Copyright Act 1968 (Cth) defines a cinematograph film as meaning the aggregate of the visual images embodied in an article or thing so as to be capable by the use of that article or thing of being shown as a moving picture, and includes the aggregate of the sounds embodied in a soundtrack associated with such visual images: s 10. Case study [8.840] A computer video game has been held to be a cinematograph film notwithstanding that the game's visual images were created by a computer running a computer program: Galaxy Electronics Pty Ltd v Sega Enterprises Ltd (1997) 75 FCR 8.

Subsistence of copyright [8.850] Copyright subsists in a cinematograph film if either: (a)

the maker was a qualified person for the whole or a substantial part of the period during which the film was made;

(b)

the film was made in Australia; or

(c)

the first publication of the film took place in Australia: Copyright Act 1968 (Cth), s 90 (for the meaning of “qualified person”, see [8.770]).

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A cinematograph film is deemed to have been published if copies of the film have been sold, let on hire, or offered or exposed for sale or hire to the public: s 29(1)(b).

Exclusive rights [8.860] Copyright in a cinematograph film is the exclusive right: (a)

to make a copy of the film;

(b)

to cause the film to be seen or heard in public; and

(c)

to communicate the film to the public.

The exclusive right to communicate the film to the public replaces and extends the former exclusive right to broadcast the film. As to the meaning of “communicate” and “to the public”, see [8.400].

Ownership of copyright [8.870] The owner of the copyright in a cinematograph film is the maker of the film: Copyright Act 1968 (Cth), s 98(2). The maker of a film is the person who does the things necessary for the production of the first copy of the film: s 22(4). However, where the maker of the film has made it under contract for some other person, then the latter (that is, the party commissioning the making of the film) is the copyright owner in the absence of any agreement to the contrary: s 98(3).

Exception to infringement: format-shifting [8.880] The Copyright Act 1968 (Cth), s 110AA permits the owner of a videotape embodying a cinematograph film to make a copy of the film in electronic form for his or her private and domestic use subject to certain conditions: see [8.680].

Duration of copyright [8.890] Where copyright subsists in a cinematograph film under the Copyright Act 1968 (Cth) it continues to subsist until the film is published, and thereafter for 70 years after the end of the calendar year in which the film is first published: s 94(1).

3. Television and sound broadcasts [8.900] The Copyright Act 1968 (Cth) defines television broadcast as meaning visual images broadcast by way of television, together with any sounds broadcast for reception along with those images: s 10. A sound broadcast means sounds broadcast otherwise than as part of a television broadcast. A broadcast is a communication to the public delivered by a broadcasting service within the meaning of the Broadcasting Services Act 1992 (Cth). [8.900] 383

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Subsistence of copyright [8.910] Copyright subsists in a television broadcast or a sound broadcast made from a place in Australia: (a)

under the authority of a licence under the Broadcasting Services Act 1992 (Cth); or

(b)

by the Australian Broadcasting Corporation (ABC) or the Special Broadcasting Service Corporation (SBS): Copyright Act 1968 (Cth), s 91.

Exclusive rights [8.920] Copyright in relation to a television broadcast or sound broadcast is the exclusive right: (a)

in the case of a television broadcast insofar as it consists of visual images, to make a cinematograph film of the broadcast, or a copy of such a film;

(b)

in the case of a sound broadcast or television broadcast, so far as it consists of sounds, to make a sound recording of the broadcast, or a copy of such a sound recording; and

(c)

in the case of a television or sound broadcast, to rebroadcast it or otherwise communicate it to the public: Copyright Act 1968 (Cth), s 87.

Case study [8.930] Network Ten used excerpts from Channel Nine programs as part of its satirical program, The Panel. The excerpts ranged from eight seconds to 42 seconds in duration. The Full Federal Court held that Network Ten, by making a video tape (that is, cinematograph film) of the excerpts (see Copyright Act 1968 (Cth), s 87(a) at [8.920]) and rebroadcasting them (see s 87(c) at [8.920]), had infringed copyright in Channel Nine’s television broadcasts from which the excerpts were extracted. The High Court (by a majority of 3:2) allowed Channel Ten’s appeal. In doing so, the High Court rejected the Full Court’s decision that each visual image capable of being observed as a separate image on a television screen and accompanying sounds is “a television broadcast” in which copyright subsists. The High Court held “a television broadcast” comprised a television program identified by a title such as The Today Show, Wide World of Sports etc. The issue therefore was whether the excerpts broadcast by Channel Ten constituted a substantial part of the Channel Nine programs for the purposes of s 14(1) and the case was remitted back to the Full Federal Court to be decided on the basis of the High Court’s decision: Network Ten Pty Ltd v TCN Channel Nine Pty Ltd (2004) 218 CLR 273. In later proceedings, the Full Federal Court emphasised that substantiality involves a question of quality and not primarily quantity. The majority held that a substantial part of six of the eleven programs was copied by re-broadcasting extracts that were material, important, central or which were highlights. However, the extracts of five of the programs were held not to be substantial 384 [8.910]

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because they were insignificant in the context of the program: TCN Channel Nine Pty Ltd v Network Ten Pty Ltd (No 2) (2005) 145 FCR 35.

[8.940] As to the meaning of “communicate” and “to the public”, in relation to the exclusive right to communicate the broadcast to the public in (c) at [8.920], see [8.400].

Ownership of copyright [8.950] The maker of a television or sound broadcast is the owner of any copyright subsisting in the broadcast: Copyright Act 1968 (Cth), s 99. A broadcast is taken to have been made by the person who provided the broadcasting service by which the broadcast was delivered: s 22(5).

Exception to infringement: time-shifting [8.960] The Copyright Act 1968 (Cth), s 111 (following amendment by the Copyright Amendment Act 2006 (Cth)) permits “time-shifting”, that is, the recording of broadcasts for replaying at a more convenient time than when the broadcast is made. More specifically, it is not an infringement of copyright to make a cinematograph film or sound recording of a broadcast solely for private or domestic use by watching or listening to the broadcast at a more convenient time: s 111(1). The making of the film or recording does not infringe copyright either in the broadcast itself or in any work or other subject matter included in the broadcast: s 111(2). If a copy is sold, let for hire, offered for sale or hire, or distributed for trade or other purposes then the recording becomes an infringing copy: s 111(3). The person making the recording may lend it to a member of their family or household for the member’s private and domestic use: s 111(4). The Full Federal Court held that the provision did not apply to an electronic subscription service provided by Optus which allowed its customers to play back television broadcasts of football matches at a later time on their mobile devices or personal computers: National Rugby League Investments Pty Ltd v Singtel Optus Pty Ltd (2012) 201 FCR 147.

Duration of copyright [8.970] Copyright in a television or sound broadcast subsists until the expiration of 50 years after the end of the calendar year in which the broadcast was made: Copyright Act 1968 (Cth), s 95(1).

4. Published editions [8.980] The Copyright Act 1968 (Cth) provides for copyright in a new published edition of a literary, dramatic, musical or artistic work: s 92. Thus, copyright subsists in the typographical arrangement of the printed pages separate from any copyright that may subsist in the material published. Copyright subsists in [8.980] 385

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a published edition of a work where the first publication of the edition took place in Australia, or the publisher of the edition was a qualified person at the date of the first publication of the edition (as to the meaning of “qualified person”, see [8.770]). An edition of a work is deemed to have been published if reproductions of the edition have been supplied (whether by sale or otherwise) to the public: s 29(1). Copyright in a published edition of a literary, dramatic, musical or artistic work is the exclusive right to make a facsimile copy of the edition: s 88. The owner of the copyright is the publisher of the edition: s 100. Copyright in a published edition of a work subsists for 25 years after the end of the year in which the edition was first published: s 96.

Importation and sale [8.990] Part IV (ss 102, 103) of the Copyright Act 1968 (Cth) contains analogous provisions to those found in Pt III (ss 37, 38, [8.460]) under which it is an infringement of copyright for a person to import an article into Australia for sale or hire if it would have been an infringement of copyright for the importer to have made the article in Australia and the importer knew, or ought reasonably to have known, this: s 102. Similarly, it is an infringement for a person to sell or hire an article if the person knew, or ought reasonably to have known, that the making of the article constituted an infringement of the copyright or, in the case of an imported article, would, if the article had been made in Australia by the importer, have constituted such an infringement: s 103. The importation and sale provisions can be used to prevent the sale of pirate copies of CDs, tapes and videos, provided the requisite knowledge on the part of the retailer that they were infringing copies can be shown: Raben Footwear Pty Ltd v Polygram Records Inc (1997) 75 FCR 88. Furthermore, importers are strictly liable for the importation of goods with, for example, pirate labelling or packaging: s 102(2).

Removal of the restrictions on the parallel importation of sound recordings [8.1000] Formerly, ss 102 and 103 of the Copyright Act 1968 (Cth) were frequently used by the overseas owners of the Australian copyright in CDs and tapes to prevent their importation other than through authorised Australian distributors. However, the use of the importation and sale provisions in ss 102 and 103 to prevent the parallel importation of genuine copies of CDs and tapes from overseas has been effectively removed. It is now provided that it is not an infringement of copyright in a work (that is, a musical, dramatic or literary work) recorded in a sound recording (including CDs and tapes), nor is it an infringement of copyright in the sound recording itself, to import a 386 [8.990]

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non-infringing copy of the sound recording into Australia and to deal commercially with that copy: ss 44D and 112D. It is important to observe that the provisions permitting the parallel importation of sound recordings only apply to legitimate (as distinct from pirate) sound recordings, referred to in the Act as a “non-infringing copy” as defined in s 10AA. Further, if the importation of a sound recording is challenged, the onus is on the importer or seller to establish that it is genuine: s 130A.

Statutory defences Fair dealing [8.1010] Originally, the defence of fair dealing was only applicable in respect of works, that is, literary, dramatic, musical and artistic works. However, it is now provided that a fair dealing with an “audio-visual item” (that is, a sound recording, a cinematograph film, and a sound or television broadcast (Copyright Act 1968 (Cth), s 100A)), does not constitute an infringement of the copyright in the item, or in any work or other audio-visual item included in the item, if it is for one of the following purposes: (a) (b) (c)

(d)

criticism or review – provided a sufficient acknowledgment of the work is made (s 103A); parody or satire (s 103AA); the reporting of news – either in a newspaper, magazine or similar periodical (with acknowledgment), or by means of a communication or in a cinematograph film (s 103B); or research or study: s 103C.

In determining whether a dealing with an audio-visual item constitutes a fair dealing for the purpose of research or study, regard is to be had to a number of matters including: (a)

the purpose and character of the dealing;

(b)

the nature of the audio-visual item;

(c)

the possibility of obtaining the audio-visual item within a reasonable time at an ordinary commercial price;

(d)

the effect of the dealing on the potential market for, or value of, the audio-visual item; and

(e)

where only a part of the audio-visual item is copied, the amount and substantiality of the part copied in relation to the whole item.

Acts done for purposes of judicial proceedings [8.1020] Copyright subsisting by virtue of Pt IV of the Copyright Act 1968 (Cth), that is, in sound recordings, cinematograph films, television and sound broadcasts, and published editions of works, is not infringed by anything done: [8.1020] 387

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(a)

for the purposes of a judicial proceeding or a report of a judicial proceeding;

(b)

for the purpose of seeking professional advice from, or the giving of professional advice by, a legal practitioner, patent attorney or trade marks attorney: s 104.

Assignments and licences [8.1030] Copyright can be dealt with in the same way as other forms of personal property. It can be assigned, included in a will or passed on according to the laws relating to intestacy: Copyright Act 1968 (Cth), s 196(1).

Assignments [8.1040] An assignment must be in writing and signed by or on behalf of the assignor, that is, the copyright owner, in order to be effective against third parties: Copyright Act 1968 (Cth), s 196(3). Partial assignments are generally permissible: thus, an assignment may be limited to one or more of the exclusive rights comprised in the copyright, or to rights not separately specified in the Act as being comprised in the copyright (for example, serial rights) but which fall within one of the classes of acts which the copyright owner is given the exclusive right to do (for example, to reproduce the work in a material form). Further, the assignment may be limited as to time or geographical area: s 196(2). Consequently, there may be a number of legal owners entitled to copyright according to their respective interests, independently of the other owners: s 30. Each legal owner has a right to sue, for example, for damages to compensate for breach of copyright according to the nature of their interest.

Licences [8.1050] A licence is to be distinguished from an assignment. In the case of an assignment there is a transfer of copyright to the assignee that vests the copyright in the assignee, whereas a licence authorises the licensee to do an act that without the licence would constitute an infringement of copyright. A licence is as effective and enforceable against successors in title of the grantor of the licence as it was against the grantor: Copyright Act 1968 (Cth), s 196(4). A licence may be exclusive or non-exclusive.

Exclusive licence [8.1060] An exclusive licence must be in writing, signed by or on behalf of the owner or prospective owner of the copyright, authorising the licensee to the exclusion of all other persons (including the grantor) to do an act that the owner of the copyright would have the exclusive right to do but for the licence: see definition of “exclusive licence” in Copyright Act 1968 (Cth), s 10, and Young v Odeon Music House Pty Ltd (1976) 10 ALR 153. 388 [8.1030]

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The Copyright Act 1968 gives the exclusive licensee a right of action concurrent with that of the owner of the copyright in relation to the remedies of injunction, damages or account of profits provided by s 115, and an exclusive right of action for conversion or detention provided by s 116 in respect of infringing copies: s 119; see also ss 120 – 125. On the remedies for infringement generally, see [8.1100].

Implied licences [8.1070] A licence that is not exclusive may be oral or implied by conduct or the custom of the trade, since only an exclusive licence must be in writing. For example, where an author is engaged for a fee to prepare a particular work which would of its nature be reproduced, there is an implied permission or consent by the author for use of the work in the manner and for the purpose contemplated between the parties at the time of the engagement: Beck v Montana Constructions Pty Ltd [1964] NSWR 229. In that case, it was held that payment by the owner of land for an architect’s sketch plans included implied permission or consent to use the plans for the purpose of building a structure on the land in substantial accordance with the plans and the right to transfer them to the new owner of the land. This principle appears to have been accepted by the High Court in Concrete Pty Ltd v Parramatta Design & Developments Pty Ltd (2006) 229 CLR 577, at least in circumstances where the architect is paid a professional fee to prepare the plans and drawings. However, such implied licence may be excluded either by an express provision of the contract or if it is inconsistent with the terms of the contract: Devefi Pty Ltd v Mateffy Perl Nagy Pty Ltd (1993) 37 IPR 477: Case study [8.1080] In Devefi Pty Ltd v Mateffy Perl Nagy Pty Ltd (1993) 37 IPR 477 an engineer prepared plans for a client for the construction of a building. The contract provided that a licence to use the plans was granted to the client only and prohibited assignment of the benefit of the contract without the consent in writing of the engineer. The client, who was in financial difficulty and had not paid for the plans, sold the building site to a developer who used the engineer’s plans to construct the building. It was held by the Full Federal Court that any term which otherwise might be implied in the contract between the engineer and the client was superseded or supplanted by the terms of the contract. Accordingly, the use of the plans by the developer to construct the building constituted an infringement of the engineer’s copyright in the plans.

Transfer of future copyright [8.1090] A future copyright is also transferable either wholly or partially. Where an agreement is made assigning a copyright not yet in existence (for example, in a contract by an author with a publisher to write a book), the [8.1090] 389

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copyright vests in the assignee (for example, the publisher) when it comes into existence: Copyright Act 1968 (Cth), s 197(1).

Remedies for infringement of copyright [8.1100] The civil remedies available for infringement of copyright are: (a)

an injunction;

(b)

damages;

(c)

an account of profits;

(d)

additional damages;

(e)

damages for conversion; and

(f)

delivery up of infringing copies or plates used for making such copies: Copyright Act 1968 (Cth), ss 115, 116.

Injunction [8.1110] The Copyright Act 1968 (Cth) provides that a court may grant an injunction for infringement of copyright subject to such terms, if any, as the court thinks fit. The court may grant either an interlocutory or final injunction to restrain the infringement or threatened infringement. To obtain a final injunction the plaintiff must prove an infringement which is likely to continue or a strong case of threatened infringement, and at least a probability of damage, although actual damage need not be proved: Sydney Organising Committee for the Olympic Games v Clarke (1998) 41 IPR 403. An interlocutory injunction is an injunction granted before the trial of the action to ensure that the specified acts do not take place pending the trial and the final determination of the rights of the parties. In determining whether to grant an interlocutory injunction, the court must first inquire whether there is a serious question to be tried and then consider whether the balance of convenience lies in favour of granting or refusing the interlocutory relief being sought: Hinchliff v Abu-Dabat (1998) 41 IPR 400. What is meant by balance of convenience in this context is whether the inconvenience or injury that the plaintiff would be likely to suffer if an injunction was refused, outweighs or is outweighed by the injury which the defendant would suffer if an injunction was granted.

Damages [8.1120] In an action for infringement of copyright the court may grant either damages or an account of profits: Copyright Act 1968 (Cth), s 115(2). These remedies are alternative not cumulative. Accordingly, if a plaintiff elects to seek damages for infringement, they cannot obtain relief by way of an account of profits and vice versa. 390 [8.1100]

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In appropriate cases, the measure of damages may be assessed as the price the infringer would have had to pay had they obtained a licence or permission to use the work. Case study [8.1130] The appellant project builder was awarded $3,000 against the respondents, a husband and wife, who had used the appellants' floor plan with some slight modifications to have a house built for them by another builder since they regarded the appellant builder's price for building the house as too high. The damages were assessed on the basis of what would be the appropriate licence fee for the user of the plans in question: Caj Amadio Constructions Pty Ltd v Kitchen (1991) 23 IPR 284; see similarly, Tolmark Homes Pty Ltd v Paul (1999) 46 IPR 321.

The “innocent infringer” defence [8.1140] Where in an action for infringement of copyright it is established that an infringement was committed but it is also established that at the time of the infringement the defendant was not aware, and had no reasonable grounds for suspecting, that the act constituting infringement was an infringement, the plaintiff cannot recover damages for the infringement although he or she is entitled to an account of profits: Copyright Act 1968 (Cth), s 115(3). Case study [8.1150] The plaintiff builder had given a couple a plan for building a house on land which they owned. The couple made a pencil sketch of the plan which they showed the first defendant, another builder. The defendant builder suggested that a draftsman prepare a more detailed plan which was done and the house was built by the first defendant builder. It was held that the pencil sketch made by the couple, the plans drawn up by the draftsman, and the house built by the defendant builder all infringed copyright in the plaintiff builder’s plan. However, it was further held that the defendant builder was not liable for damages for infringement because he was unaware of the plaintiff’s copyright in the plan and hence was able to make out the “innocent infringer” defence. Accordingly, only the couple were liable for infringement of the plaintiff’s copyright: Kiama Constructions v MC Casella Building Co Pty Ltd (1980) 10 IPR 345; see also, Golden Editions Pty Ltd v Polygram Pty Ltd (1996) 61 FCR 479.

Account of profits [8.1160] A court may order an account of profits in an action for infringement of copyright: Copyright Act 1968 (Cth), s 115(2). An account of profits is an equitable remedy and, accordingly, the court has a discretion whether to order an account. The purpose of the remedy is not to punish the infringer but to prevent unjust enrichment. [8.1160] 391

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An account of profits may be awarded even if the infringer was unaware and had no reasonable grounds for suspecting there was an infringement of copyright: s 115(3). In quantifying an account of profits, it is only those profits that can be attributed to the infringing use that will be awarded. Accordingly, without any evidence to demonstrate the profits actually made attributable to the infringing use, an account of profits will not be awarded: Facton Ltd v Toast Sales Group Pty Ltd (2012) 205 FCR 378. Where an order for an account of profits is made, the applicant is entitled to recover a sum which represents that proportion of the respondent’s profit which was fairly attributable to the infringement of the applicant’s copyright: Robert J Zupanovich Pty Ltd v B & N Beale Nominees Pty Ltd (1995) 59 FCR 49. Case study [8.1170] The plaintiff company was a project home builder. It successfully argued that the building plans for some 90 houses built by the defendant company, which was also a project home builder, infringed copyright in nine of the plaintiff's floor plans. It was held that the plaintiff company was entitled to 35 per cent of the defendant company’s profits as the amount calculated as being derived by the defendant as a result of its infringement of the plaintiff’s copyright. This figure was based on the plaintiff being entitled to the proportion of the defendant’s building profit that fairly reflected the extent to which the infringing plans (as opposed to other factors) induced the defendant’s customers to contract with the defendant: LED Builders Pty Ltd v Eagle Homes Pty Ltd (1999) 44 IPR 24.

Additional damages [8.1180] Where an infringement of copyright is established, the Copyright Act 1968 (Cth) gives a court power to award additional damages where it is satisfied that it is appropriate to do so having regard to: (a)

the flagrancy of the infringement;

(b)

the need to deter similar infringements of copyright;

(c)

the conduct of the defendant after the act constituting the infringement or, if relevant, after the defendant was informed that the defendant had allegedly infringed the plaintiff’s copyright;

(d)

whether the infringement involved the conversion of a work or other subject-matter from hardcopy or analogue form into a digital or other electronic machine-readable form;

(e)

any benefit shown to have accrued to the defendant by reason of the infringement; and

(f)

all other relevant matters: s 115(4).

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Case study [8.1190] The defendant offered to supply prospective customers with an unauthorised copy of the plaintiff's computer program as an inducement for them to purchase a personal computer from him. The plaintiff owner of the copyright was awarded $15,000 compensatory damages for the defendant's infringement of copyright in the computer program, and a further $35,000 additional damages for the flagrancy of the infringement: Autodesk Australia Pty Ltd v Cheung (1990) 94 ALR 472; see similarly, Microsoft Corpn v Ezy Loans Pty Ltd (2004) 63 IPR 54.

Case study [8.1200] Substantial additional damages of $70,000 were awarded for the personal harm caused by the flagrant pirating of Aboriginal cultural heritage on imported carpets which reproduced Aboriginal artworks without authority. This amount was in addition to compensatory and conversion damages and an order for the delivery up of those infringing carpets which had not been sold: Milpurrurru v Indofurn Pty Ltd (1994) 54 FCR 240.

[8.1210] The Full Court of the Federal Court awarded additional damages of $200,000 for the blatant infringement of copyright in the artwork panels on reconditioned electronic gaming machines and the computer programs that operated the machines: Aristocrat Technologies Australia Pty Ltd v DAP Services (Kempsey) Pty Ltd (in liq) (2007) 157 FCR 564. The plaintiff collecting society was awarded additional damages of $60,000 against the defendant directors of a Melbourne restaurant in which sound recordings were played without a licence for over five years despite repeated requests to either obtain a licence or cease playing the recordings: Phonographic Performance Company of Australia Ltd v Cattch Pty Ltd (2013) 102 IPR 286. Infringement of copyright by the importation and sale of counterfeit branded clothing resulted in an award of additional damages of $17,000 as well as damages of $8,662.50 for lost sales and $10,000 damages for loss of reputation: Facton Ltd v Erdogan (No 1) (2012) 99 IPR 46.

Damages for conversion or detention [8.1220] The owner of copyright in a work or other subject matter (that is, a sound recording, film, broadcast or published edition) has the right to bring an action for conversion or detention in respect of infringing copies and any device used in making them. In such an action the court may grant those remedies that would be available as if the copyright owner had been the owner of the infringing copy since the time the copy was made, or the owner of the device used in making them: Copyright Act 1968 (Cth), s 116(1), (1A). However, the court is not to grant relief in an action for conversion or detention if the relief the court has granted under s 115 (that is, an injunction, [8.1220] 393

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damages or an account of profits) is, in the court’s opinion, a sufficient remedy. In deciding whether to grant relief and in assessing the amount of damages payable, the court may have regard to: (a)

the expenses incurred by the defendant in manufacturing or acquiring the infringing copy;

(b)

whether the expenses were incurred before or after the infringing copy was sold or otherwise disposed of by the defendant; and

(c)

any other matter that the court considers relevant.

If the infringing copy is an article of which only part consists of material that infringes copyright, the court, in deciding whether to grant relief and in assessing the amount of damages payable, may also have regard to: (a)

the importance to the market value of the article of the material that infringes the copyright;

(b)

the proportion the material that infringes copyright bears to the article; and

(c)

the extent to which the material that infringes copyright may be separated from the article: s 116(1C) – (1E); see Sony Entertainment (Australia) Ltd v Smith (2005) 64 IPR 18.

The “innocent infringer” defence [8.1230] As in the case of a claim for damages for infringement (see [8.1140]), the Copyright Act 1968 (Cth) provides, in essence, that damages cannot be obtained against an innocent defendant in an action for conversion or detention: s 116(2). Under the latter subsection a plaintiff is not entitled to any damages, or to any other pecuniary remedy other than costs, in an action for conversion or detention if it is established that at the time of the conversion or detention: (a)

the defendant was not aware, and had no reasonable grounds for suspecting, that copyright subsisted in the work or other subject matter to which the action relates; or

(b)

the defendant believed, and had reasonable grounds for believing, that the articles converted or detained were not infringing copies (see, for example, Golden Editions Pty Ltd v Polygram Pty Ltd (1996) 61 FCR 479); or

(c)

where the article converted or detained was a device used or intended to be used for making articles, the defendant believed, and had reasonable grounds for believing, that the articles so made or intended to be made were not or would not be infringing articles.

Delivery up of infringing copies or plates [8.1240] As indicated in the previous section, a claim may be made by the copyright owner in an action for detinue under s 116(1) of the Copyright Act 394 [8.1230]

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1968 (Cth) for the delivery up of infringing copies or plates on the basis that the copyright owner is deemed to be the owner of the copies or plates. Independently of the Copyright Act 1968, the court may order to be delivered up any infringing copies based on the general jurisdiction of the court to order delivery up of all articles which have been created in violation of the plaintiff’s rights: Milpurrurru v Indofurn Pty Ltd (1994) 54 FCR 240.

Anton Piller orders [8.1250] Australian courts have power to make orders on the application of a plaintiff whereby the defendant is ordered to permit the plaintiff’s solicitors to enter the defendant’s premises for the purpose of searching for and removing into custody infringing copies of works or other subject matter and documents relating to them: Polygram Records Pty Ltd v Monash Records (Aust) Pty Ltd (1985) 10 FCR 332. Such order is of particular value against a recalcitrant defendant. It is commonly referred to as an Anton Piller Order from the name of the English case (Anton Piller KG v Manufacturing Processes Ltd [1976] Ch 55) from which it is derived. However, the power to make such an order will only be exercised in exceptional circumstances: Microsoft Corporation v Goodview Electronics Pty Ltd (1999) 46 IPR 159.

Limitations on the liability of carriage service providers [8.1260] One of the purposes of the Copyright Amendment (Digital Agenda) Act 2000 (Cth) was to clarify the liability of carriage service providers, for example Internet service providers (ISPs), for infringements of copyright committed by third parties while using their facilities. A carriage service provider is not directly liable for an infringement of copyright involved in a communication (that is, making copyright material available online – see [8.400]) where they were not responsible for determining the content of the communication: Copyright Act 1968 (Cth), s 22(6). Furthermore, a carriage service provider is not to be taken to have authorised an infringement of copyright simply by providing facilities which are used to infringe copyright: Copyright Act 1968 (Cth), ss 39B, 112E. On the matters to be taken into account in determining whether a carriage service provider has authorised an infringement of copyright under Pt IV, see [8.750] and Roadshow Films Pty Ltd v iiNet Ltd (2012) 248 CLR 42. Following the introduction of Div 2AA (ss 116AA – 116AJ) in the Copyright Act 1968 (Cth) by the US Free Trade Agreement Implementation Act 2004 (Cth), limitations have been placed on the remedies available against carriage service providers who comply with certain conditions on becoming aware of infringing material on the facilities provided by them.

[8.1260] 395

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Combatting online piracy [8.1265] In an endeavour to combat online piracy, particularly movies and television shows, the Copyright Amendment (Online Infringement Act 2015 (Cth) provides a new mechanism enabling overseas online infringing material to be blocked by a carriage service provider. The Amendment Act inserts a new s 115A in the Copyright Act 1968 (Cth) which provides that the Federal Court, on application by the owner of a copyright, may grant an injunction to require a carriage service provider to take reasonable steps to disable access to an online location if the Court is satisfied that: (a) a carriage service provider provides access to an online location outside Australia; (b) the online location infringes, or facilitates an infringement of the copyright; and (c) the primary purpose of the online location is to infringe, or to facilitate the infringement of copyright (whether or not in Australia): s 115A(1), (2). Notification of an application is to be given by the copyright owner to the carriage service provider and the person who operates the online location unless the latter’s identity or address cannot be determined by the copyright owner despite reasonable efforts: s 115A(4). In determining whether to grant an injunction the Federal Court is to take into account a list of matters including: (a) the flagrancy of the infringement; (b) whether the online location makes available or contains directories, indexes or categories of the means to infringe; (c) whether the owner or operator of the online location demonstrates a disregard for copyright generally; (d) whether disabling access to the online location is a proportionate response; (e) the impact on any person, or class of persons, likely to be affected by the grant of an injunction; and (f) whether it is in the public interest to disable access to the online location: s 115A(5). The Court may limit the duration of, rescind or vary an injunction: s 115A(7), (8). The carriage service provider is not liable for any costs unless the provider takes part in the proceedings: s 115A(9).

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Technological protection measures The anti-circumvention provisions [8.1270] The growth of copyright material in digital form and the ease with which virtually perfect reproductions of such material, legitimate or otherwise, could be made led to copyright owners incorporating various “technological protection measures” (TPMs) in their digital products to prevent copyright material from being copied or accessed. TPMs would commonly include program locks, password protection and encryption mechanisms. However, TPMs could be circumvented by password cracking tools, software decompilation programs and so on. Accordingly, the Copyright Amendment (Digital Agenda) Act 2000 (Cth) introduced civil remedies and criminal sanctions against the manufacture, commercial dealing, making available online and advertising of a circumvention device or service used to circumvent TPMs. The provisions were designed to assist copyright owners in enforcing their rights in the digital environment. The federal government gave undertakings in the Australia–United States Free Trade Agreement 2004 (AUSFTA) to implement a new liability regime for circumventing TPMs. The result was the introduction of wider provisions by the Copyright Amendment Act 2006 (Cth) to fulfil Australia’s obligations under the AUSFTA: Copyright Act 1968 (Cth), ss 116AK – 116AQ. Basically, action may be taken in respect of three types of conduct in relation to technological protection measures. That is, the owner or exclusive licensee of copyright may bring an action against a person who:

[8.1270] 397

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(a)

does an act that results in the circumvention of an “access control technological protection measure” (s 116AN);

(b)

manufactures, imports, distributes, offers to the public or otherwise provides to another person a “circumvention device” for a “technological protection measure” (s 116AO); or

(c)

provides a “circumvention service” 18 for a technological protection measure: s 116AP.

An “access control technological protection measure” is defined as a device, product technology or component (including a computer program) that in the normal course of its operation “controls access” 19 to the work or other subject matter: s 10(1). A “technological protection measure” is defined as a device, product, technology or component (including a computer program) that in the normal course of its operation prevents, inhibits or restricts the doing of an act comprised in the copyright, or is an “access control technological protection measure”: s 10(1). Excluded from these definitions is a device or other measure which controls geographic market segmentation by preventing the playback in Australia of a non-infringing copy of a cinematograph film or computer program (including a computer game) acquired outside Australia.

Exceptions [8.1280] There are a number of exceptions to the provisions outlined in the previous section. A person is not liable if the action was done: to facilitate interoperability; 20 to enable encryption research; 21 to allow computer security testing; 22 or for the purposes of law enforcement and national security. 23 Further exceptions in relation to an act that results in the circumvention of an “access control technological protection measure” (Copyright Act 1968 (Cth), s 116AN) include: where the circumvention was done with the permission of the copyright owner or exclusive licensee; 24 to provide online privacy; 25 to

18

20 21

A “circumvention device” (in (b) above) and a “circumvention service” (in (c) above) are defined as a device or service which is promoted, advertised or marketed as having the purpose or ability to circumvent a technological protection measure; has no other or only a limited other commercially significant purpose; or is primarily or solely designed to produce or facilitate the circumvention of the technological protection measure: Copyright Act 1968 (Cth), s 10(1). A device, product technology or component (including a computer program) “controls access” if it requires the application of information or a process to gain access to the subject matter: Copyright Act 1968 (Cth), s 10(1). Copyright Act 1968 (Cth), ss 116AN(3), 116AO(3), 116AP(3). Copyright Act 1968 (Cth), ss 116AN(4), 116AO(4), 116AP(4).

25

Copyright Act 1968 (Cth), s 116AN(6).

19

22 23 24

Copyright Act 1968 (Cth), ss 116AN(5), 116AO(5), 116AP(5). Copyright Act 1968 (Cth), ss 116AN(7), 116AO(6), 116AP(6). Copyright Act 1968 (Cth), s 116AN(2).

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enable non-profit libraries and archives to make acquisition decisions; 26 and to enable a person to do a prescribed act. 27

Remedies [8.1290] The civil remedies available in actions relating to technological protection measures include an injunction and either damages or an account of profits, and an order that the circumvention device be destroyed or otherwise dealt with. In assessing damages, the court is also empowered to award such additional damages as it considers appropriate having regard to the flagrancy of the defendant’s actions; the need to deter similar acts; any benefit shown to have accrued to the defendant and any other relevant matters: Copyright Act 1968 (Cth), s 116AQ. The defendant’s conduct may also constitute a criminal offence: ss 132APC – 132APE.

Electronic rights management information [8.1300] Civil remedies and criminal offences have been introduced in respect of the intentional removal and alteration of electronic rights management information, or the commercial dealing with copyright material where such information has been removed: Copyright Act 1968 (Cth), ss 116B, 116C. Electronic rights management information is information attached to, or embodied in, a copy of the work or other subject matter that identifies the work or other subject matter, its author or copyright owner; indicates the conditions on which the work may be used; or any numbers or codes that represent such information in electronic form: s 10(1). A copyright owner or their exclusive licensee may bring a civil action against a person who removes or alters any electronic rights management information attached to a copy of a work or other subject matter where such person knew, or ought reasonably to have known, that the removal or alteration would induce, facilitate or conceal an infringement of the copyright in the work or other subject matter. The defendant is presumed to have had the requisite knowledge unless they prove otherwise: s 116B. A copyright owner or an exclusive licensee also has a right of action against a person who distributes, imports or communicates a copy of a work or other subject matter in circumstances where the rights management information has been removed or altered: s 116C.

Remedies [8.1310] The civil remedies available for actions in relation to rights management information are the same as those discussed at [8.1290] with respect to circumvention devices: Copyright Act 1968 (Cth), s 116D. 26 27

Copyright Act 1968 (Cth), s 116AN(8). Copyright Act 1968 (Cth), s 116AN(9).

[8.1310] 399

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The defendant’s conduct may also constitute a criminal offence: ss 132AQ – 132AS.

Unauthorised access to encoded broadcasts [8.1320] The Copyright Amendment Act 2006 (Cth) introduced a scheme enabling action to be brought in relation to unauthorised access to encoded broadcasts: Copyright Act 1968 (Cth), Pt VAA, ss 135AL – 135AU. The scheme enables a channel provider or any person with an interest in an encoded broadcast to bring an action against a person who: makes, sells or deals in an unauthorised decoder (s 135AOA); makes a decoder available online (s 135AOB); causes unauthorised access to an encoded broadcast (s 135AOC); or makes unauthorised commercial use of a subscription broadcast: s 135AOD. An “encoded broadcast” is defined as a subscription broadcast or an encrypted broadcast (other than a subscription or radio broadcast) delivered by a commercial broadcasting service or national broadcasting service within the meaning of the Broadcasting Services Act 1992 (Cth): Copyright Act 1968 (Cth), s 135AL. The civil remedies available include an injunction and either damages or an account of profits, and an order that the decoder be destroyed or otherwise dealt with. In assessing damages, the court is also empowered to award such additional damages as it considers appropriate having regard to the flagrancy of the defendant’s actions; the need to deter similar acts; any benefit shown to have accrued to the defendant and any other relevant matters: ss 135AOE, 135AOF. The defendant’s conduct may also constitute a criminal offence: ss 135ASA – 135AU.

Offences General [8.1330] The Copyright Act 1968 (Cth) provides for offences and penalties for certain dealings in infringing copies and devices: Pt V, Div 5, ss 132AA – 132AT. There is a tiered system of copyright criminal offences, namely: indictable, summary and strict liability offences. The main differences between the three levels of offence provisions lie in the degree of fault that must be satisfied and in the penalties. To establish an indictable offence, it is necessary to show that the infringement was either intentional or reckless. Indictable offences have penalties of up to five years’ imprisonment and/or between 550 ($93,500) to 850 ($144,500) penalty units for natural persons. In the case of corporations, the fine is up to five times that for a natural person. Most summary offences require intention and/or negligence with penalties of up to two years’ imprisonment and/or 120 penalty units ($20,400). The strict liability offences do not contain a fault element and are designed to deal with lower level copyright criminal 400 [8.1320]

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activity such as first-time offenders, street stall or market operators and attract maximum penalties of 60 penalty units ($10,200). Examples of the offence provisions include: • commercial scale infringement prejudicing the copyright owner (Copyright Act 1968 (Cth), s 132AC); • making an infringing copy commercially (s 132AD); • selling or hiring out an infringing copy (s 132AE); • importing an infringing copy commercially (s 132AH); • • possession of infringing copies with the intention of selling them (s 132AJ; Ly v R (2014) 227 FCR 304; [2014] FCAFC 175); • circumventing an (s 132APC); and

access

control

technological

protection

measure

• removing or altering electronic rights management information: s 132AQ.

Performers' protection [8.1340] The Copyright Act 1968 (Cth) contains provisions dealing with performers’ protection: Pt XIA, ss 248A – 248V. The provisions do not confer on performers copyright in their performances but do provide civil remedies and criminal sanctions for the unauthorised use of a performer’s performance.

Meaning of “performance” [8.1350] Broadly, performers are given civil remedies against those making unauthorised use of their performances. A performance includes any live performance (or improvisation) of a dramatic or musical work, performance of a dance, presentations of literary works, and performances of circus or variety acts. News reading and sporting performances are excluded: Copyright Act 1968 (Cth), s 248A.

What constitutes unauthorised use [8.1360] It is an unauthorised use, giving rise to a claim by the performer, to do the following acts without the authority of the performer: (a)

to record a performance, for example on film, video or audio tape, either directly, that is, from a live performance, or from a broadcast of a live performance; or

(b)

to broadcast or re-broadcast a live performance or an unauthorised recording.

A performer also has a right of action for unauthorised use of a performance against a person who knows, or ought reasonably to know, that a recording is unauthorised and who, inter alia, copies, sells, hires, distributes, exhibits, imports for commercial purposes, is in possession of, or gives a public performance of the unauthorised recording: Copyright Act 1968 (Cth), s 248G. [8.1360] 401

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Remedies for unauthorised use [8.1370] In an action brought by a performer for unauthorised use of their performance, the court may grant an injunction to restrain further unauthorised use, damages and such additional damages as are considered to be appropriate in the circumstances: Copyright Act 1968 (Cth), s 248J.

Effect of consent to use [8.1380] Once a performer has consented to the initial recording of their performance on, for example, cassette, disc, film or video, the performer generally has no legal right to control subsequent uses of that recording. The one exception is that where the performance is recorded on a soundtrack of a film or video, the performer can prevent the recording being used for other purposes. A performer will have no claim in respect of an exempt recording which includes, for example, a recording of a performance made off-air (that is, from a broadcast) for the private and domestic use of the person who made it, scientific research, education, helping the disabled, and a recording of a performance either made live or off-air for the reporting of news, criticism and review, judicial proceedings and legal advice: Copyright Act 1968 (Cth), s 248A.

Duration of protection [8.1390] The general period of protection for a performance is 20 years after the calendar year in which the performance was given (although this period has been extended to 50 years in respect of certain of the offence provisions referred to at [8.1400]): Copyright Act 1968 (Cth), s 248CA. The provisions apply to all acts done in relation to a performance after the commencement of Pt XIA (that is, 1 October 1989), whether the performance took place before or after the commencement of the Part. The right of a performer to bring an action under the provisions is not assignable.

Offences [8.1400] It is an offence, inter alia, without the authority of the performer to: (a)

make a sound recording or film of a live performance;

(b)

make a film or sound recording of a broadcast of a performance, subject to the exceptions with respect to exempt recordings;

(c)

broadcast or rebroadcast a live or recorded performance; or

(d)

give a public performance of a sound recording or film of a performance known to be an unauthorised recording or film: Copyright Act 1968 (Cth), s 248P.

Additional offences relating to the unauthorised use of a performer’s performance include: copying a recording known to be unauthorised; selling, hiring, or by way of trade offering for sale or hire a recording known to be 402 [8.1370]

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unauthorised; and the commercial exhibition of a recording known to be unauthorised. Penalties for breach are analogous to those outlined in the previous section with respect to other criminal penalties for offences committed under the Copyright Act 1968: s 248Q. As indicated above, the general period of protection of a performance is 20 years after it was given. However, in order to implement Australia’s international obligations under the Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPS) (discussed at [8.1560]), the Copyright (World Trade Organization Amendments) Act 1994 (Cth) amended the Copyright Act 1968 (Cth) to extend the period of protection of performers in respect of certain of the offence provisions outlined above. Thus, in the case of existing unauthorised sound recordings of performances given before 1 July 1995 the offence provisions apply for a period of 50 years from the end of the calendar year in which the performance was given. A further 50-year protection period also applies to future unauthorised sound recordings of performances: s 248CA. The performers’ protection provisions of the Copyright Act 1968 discussed above apply to a live performance given in Australia, or a performance given by one or more qualified persons, that is, Australian citizens and residents. In addition, protection is extended by the Copyright (International Protection) Regulations 1969 (Cth), regs 4A, 4B to overseas performances and performers in countries which offer equivalent protection to Australian performers and to certain performances having a connection with certain World Trade Organisation countries: see “International copyright protection” at [8.1550].

Extension of protection for performers [8.1410] As a consequence of the Australia–United States Free Trade Agreement 2004 (established under the US Free Trade Agreement Implementation Act 2004 (Cth)), the rights of performers have been extended in certain respects. A performer is now recognised as a co-owner with the maker of the copyright in sound recordings: Copyright Act 1968 (Cth), ss 22(3A), 22(3B) and s 116AAA. Moral rights have also been extended to performers. Broadly, performers’ moral rights closely follow the moral rights granted to authors discussed at [8.1420]: that is, a performer has a right of attribution of performership (s 195ABA); a right not to have performership falsely attributed (s 195AHA) and a right of integrity of performership: s 195ALA. Detailed discussion of these provisions is beyond the scope of the present work.

Moral rights [8.1420] The Copyright Act 1968 (Cth) was amended by the Copyright Amendment (Moral Rights) Act 2000 (Cth) to provide greater recognition of the moral rights of authors: Copyright Act 1968 (Cth), Pt IX, ss 189 – 195AZO. The provisions came into effect on 21 December 2000. [8.1420] 403

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Nature of moral rights [8.1430] The expression moral rights refers to the personal or non-economic rights of authors. They are rights that are essentially concerned with the personal relationship between authors, artists and other creators and their works. Moral rights are in addition to, and separate from, the economic rights protected by copyright. The basic moral rights recognised by the legislation are (Copyright Act 1968 (Cth), s 189): (a)

the right of attribution of authorship (that is, the right to be recognised as the author of a work);

(b)

the right not to have authorship falsely attributed; and

(c)

the right of integrity of authorship (that is, the right of a creator to object to derogatory treatment of their work).

These rights are additional to any other rights in relation to the work that the author or anyone else has under the Act: s 192.

Beneficiaries of protection [8.1440] Moral rights are held by individual creators of literary, dramatic, musical and artistic works, and the makers of cinematograph films. The maker of a film includes the director, producer and the screenwriter of the film: Copyright Act 1968 (Cth), s 189.

Right of attribution of authorship [8.1450] The right of attribution is the right to be identified as the author of a work if any attributable act is done in relation to the work: Copyright Act 1968 (Cth), s 193(2). “Attributable act” essentially means the doing of an act comprised in any of the exclusive economic rights conferred on the work or film under the provisions of Pt III or IV of the Act, for example, reproducing or publishing the work: s 194. In the case of an artistic work, an attributable act also includes exhibiting the work in public (s 194(2)(c)); accordingly, where an artistic work is exhibited, the artist must be identified. An author may be identified by any reasonable form of identification which, however, must be clear and reasonably prominent: ss 195(1), 195AA, 195BB. The moral right of attribution is infringed where a person does an attributable act in respect of the work, for example reproduces or publishes the work, without identifying the author in accordance with these provisions: s 195AO.

Right not to have authorship falsely attributed [8.1460] This is the right of an author not to have a person do any of the acts of false attribution enumerated by the Copyright Act 1968 (Cth), for example, affixing a person’s name on a work or film in such a way as to imply falsely that the person is the author of the work or film: ss 195AC – 195AH. 404 [8.1430]

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The right is infringed if a person does an act of false attribution in respect of the work (s 195AP), for example, puts a person’s name on a work so as to falsely represent that the person is the author of the work.

Right of integrity of authorship [8.1470] An author’s right of integrity is the right not to have their work or film subjected to derogatory treatment: Copyright Act 1968 (Cth), s 195AI. Derogatory treatment includes the doing of anything that results in a material distortion of, the mutilation of, or a material alteration to, the work that is prejudicial to the author’s honour or reputation: ss 195AJ – 195AL. A person infringes an author’s right of integrity if the person subjects the work to derogatory treatment: s 195AQ. The alteration by a disc jockey of the sound recording of a song by the introduction of extraneous matter and streaming the edited version from his website resulted in an award of $10,000 damages for infringement of the author’s right of integrity in the song: Perez v Fernandez (2012) 260 FLR 1. 28

Consent provisions [8.1480] The Copyright Act 1968 (Cth) provides for the users of material to which moral rights attach to obtain the written consent of an author to do, or omit to do, something which would otherwise constitute an infringement of the author’s moral rights. In the case of cinematograph films, and works used in films, such consent may be given in relation to all or any acts occurring before or after the consent is given, and may relate to a specified work or works, or a work of a particular description, the making of which has not yet begun or is not yet completed: s 195AW. In relation to other works, there are similar consent provisions but they require an author to specify the acts or omissions, or specified classes or types of acts or omissions to which the consent relates: s 195AWA. Employees may give consent in favour of their employer in relation to all works produced in the course of their employment: ss 195AW(4), 195AWA(4).

Defences to alleged infringements [8.1490] The Copyright Act 1968 (Cth), provides a defence to an alleged infringement of the right of attribution or the right of integrity: that the act or omission was reasonable in all the circumstances. In determining whether the act or omission was reasonable, the matters to be taken into account include: (a)

the nature of the work and, in the case of a cinematograph film, the primary purpose of the film;

(b)

the purpose, manner and context in which the work or film is used;

28

See J McCutcheon, “Perez v Fernandez: Australia’s First Decision on the Moral Right of Integrity” (2013) 24 Australian Intellectual Property Journal 174. [8.1490] 405

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(c)

any practice used in the industry concerned, or specified in a voluntary code of practice developed by the relevant industry;

(d)

in relation to the right of attribution, any difficulty or expense that would have been incurred as a result of identifying the author; and

(e)

whether the work or film was made in the course of the author’s employment: ss 195AR, 195AS.

There is no express provision for judicial immunity as a defence to proceedings for infringement of moral rights; however, the common law doctrine of judicial immunity provides a defence to a judge alleged to have infringed an author’s moral rights in the course of judicial proceedings: Ogawa v Spender (2006) 151 FCR 228.

Provisions in relation to buildings [8.1500] The Copyright Act 1968 (Cth) contains provisions regarding moveable artistic works such as public art, and artistic works affixed to buildings or comprising the building itself. Basically, the Act provides that an architect’s or artist’s moral rights in a building, or a work attached to a building, will not prevent the alteration, demolition or destruction of the building provided the owner has undertaken certain actions. Broadly, the owner is required to contact the artist or architect and advise them of the proposed change or demolition. Provided the artist or architect responds within a specified time period, then where, for example, the building is to be demolished, they are to be given a reasonable opportunity to make a record of, or remove, the work: s 195AT.

Remedies for infringement of moral rights [8.1510] The relief which a court may grant in an action for infringement of an author’s moral rights include: (a)

an injunction;

(b)

damages for loss resulting from the infringement;

(c)

a declaration that a moral right of the author has been infringed;

(d)

an order that the defendant make a public apology for the infringement; and

(e)

an order that any false attribution of authorship, or derogatory treatment, of the work be removed or reversed: Copyright Act 1968 (Cth), s 195AZA.

Case study [8.1520] The respondent published in one of its magazines a photograph of Princess Mary, wife of the Crown Prince of Denmark, standing in front of a portrait of the late Dr Victor Chang which had been painted by the applicant 406 [8.1500]

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artist shortly before Dr Chang was murdered in Sydney. Unfortunately, the caption to the photograph incorrectly attributed the portrait to another artist. The applicant, distressed by the wrong attribution, sought a correction and an apology. A meeting was held between the applicant artist, his son and representatives of the respondent publisher. A personal apology was given at the meeting but no apology was published until over a year later, when the respondent published a photograph. However, the respondent had managed to reverse the image of the negative so that the photograph did not accurately reproduce the portrait. The Federal Magistrate awarded the applicant artist $1,100 for infringement of his moral rights of attribution of authorship in respect of the portrait and not to have his work falsely attributed (Copyright Act 1968 (Cth), ss 195AO and 195AP) and a further $8,000 in aggravated damages arising out of the conduct of the respondent newspaper in the particular circumstances: Meskenas v ACP Publishing Pty Ltd (2006) 70 IPR 172.

Application and duration of moral rights [8.1530] Moral rights exist in works whether the works are made before or after the commencement of the legislation but only in relation to infringements that take place after commencement. However, for cinematograph films, and works included in a film, moral rights apply only to films made after the legislation came into force: Copyright Act 1968 (Cth), ss 195AZM – 195AZO. Generally, an author’s moral rights in respect of a work continue in force for as long as copyright subsists in a work, that is, the life of the author plus 70 years for works and 70 years from the first publication of a film. However, in the case of a cinematograph film, the right of integrity ceases on the death of the maker of the film: s 195AM. After an author’s death, their moral rights can be enforced by their legal personal representative (other than the right of integrity in respect of a cinematograph film): s 195AN.

Resale royalty right for visual artists [8.1540] A resale royalty scheme has been established under the Resale Royalty Right for Visual Artists Act 2009 (Cth). The scheme commenced on 9 June 2010. Broadly, artists are eligible to receive 5 per cent of the sale price on the “commercial resale” of their original works. A “commercial resale” means, in essence, a resale through the art market, for example, by an art auctioneer, the owner of an art gallery or an art dealer. The resale royalty is payable on the sale of an artwork if: (i) the sale occurs on after 9 June 2010; (ii) the sale price is not less than $1,000; (iii) the artist is living or has been dead for less than 70 years; (iv) the artist, or beneficiary of the artist’s estate, is an Australian citizen or permanent resident; and (v) it is not the first change of ownership on or after 9 June 2010. Artworks covered by the scheme include artists’ books; batiks; carvings; ceramics; collages; digital artworks; drawings; engravings; [8.1540] 407

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fine art jewellery; glassware; installations; lithographs; multimedia artworks; paintings; photographs; pictures; prints; sculptures; tapestries; video artworks; and weavings. The scheme is administered by Copyright Agency Limited (CAL).

International copyright protection The Berne and UCC Conventions [8.1550] Australia is a member of the Berne Convention for the Protection of Literary and Artistic Works of 1886 and the Universal Copyright Convention of 1952. In consequence, it is part of a worldwide international system of copyright protection since most of the major countries of the world are members of one or both of these international Conventions. Briefly, the Conventions provide for certain minimum standards of protection for works and also embody the principle of national treatment whereby works of nationals of member countries and works first published in a member country must be given the same protection as each member country gives to the works of its own nationals. In Australia, the Copyright Act 1968 (Cth) makes provision for the Act to be applied to member countries of the Berne Convention and the Universal Copyright Convention: ss 184 – 188. This is achieved by the Copyright (International Protection) Regulations 1969 (Cth), which have extended the operation of the Copyright Act 1968 (Cth) in relation to works and other subject matter to cover making or first publication in a Convention country or by a national or resident of such a country: Copyright (International Protection) Regulations 1969 (Cth), reg 4. In this way literary, dramatic, musical and artistic works, sound recordings and cinematograph films made or published in a Convention country are given the same protection as they would be given in the event of making or first publishing in Australia. However, the protection afforded to foreign works will not be greater than that given by the law of the Convention country concerned. For example, the Copyright (International Protection) Regulations 1969 provide for the recognition of a public performance right or broadcasting right only where such rights are recognised under the law of the Convention country concerned: regs 6, 7. Australian authors and publishers are accorded similar copyright protection for their works and other subject matter in the member countries of the Berne and Universal Copyright Conventions.

The TRIPS agreement [8.1560] On 1 January 1995, Australia became a party to the World Trade Organization (WTO), an international body which administers certain international trade agreements including the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). TRIPS requires Member States to comply with the basic provisions of the Berne Convention and sets down a number of 408 [8.1550]

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other minimum requirements for the protection of intellectual property. The significance of TRIPS is that it contains extensive provisions for the enforcement of intellectual property rights. The Copyright (World Trade Organization Amendments) Act 1994 (Cth) amended the Copyright Act 1968 (Cth) to comply with the requirements of TRIPS as it applies to copyright and related rights.

DESIGNS [8.1570] Designs law is concerned with the protection of the visual form of articles with the object of encouraging innovation in the creation of new designs. The Australian law of designs is governed by the Designs Act 2003 (Cth) which came into operation on 17 June 2004. The Act implements many of the recommendations of the Australian Law Reform Commission in its report on designs 29 which was highly critical of the operation of the former legislation governing the protection of industrial designs, the now repealed Designs Act 1906 (Cth). Protection for industrial designs is available by way of registration of new and distinctive designs for products in the Register of Designs administered by the Designs Office in IP Australia. Designs are registered for a very wide range of articles including electrical and electronic goods, building materials, domestic items such as chairs and air conditioners, sporting goods and fashion accessories, optical goods, jewellery, cutlery, toys and so on.

Meaning of “design” [8.1580] The definition of “design” in the Designs Act 2003 (Cth) emphasises that a design for the purposes of the Act means the visual features of a product: design, in relation to a product, means the overall appearance of the product resulting from one or more visual features of the product: s 5.

A “visual feature” in relation to a product is in turn defined as including the shape, configuration, pattern and ornamentation of the product. A visual feature may serve a functional purpose: s 7. The definition of a “design” (above) refers to the overall appearance of a “product” which is “a thing that is manufactured or hand made”: s 6(1). A component part of a product may itself be a product if it is made separately: s 6(2). A kit which forms a product when assembled is also included in the definition: s 6(4).

29

ALRC, Report No 74, Designs (1995). [8.1580] 409

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Registration of a design [8.1590] An application in respect of a design may be made by one or more persons in relation to one or more designs and must specify the person or persons who is or are entitled to be entered on the Register as the registered owner or owners of the design: Designs Act 2003 (Cth), ss 21, 22.

Design must be new and distinctive [8.1600] To be registrable the design must be new and distinctive. Section 15(1) of the Designs Act 2003 (Cth) provides: A design is a registrable design if the design is new and distinctive when compared with the prior art base for the design as it existed before the priority date of the design.

The “prior art base” against which the question of whether the design is new and distinctive is to be compared, essentially consists of those designs publicly used in Australia and designs published in Australia and overseas at the priority date of the design. For example, the design of a vacuum cleaner on a brochure distributed at the Canton fair in China was held to be part of the “prior art base” for the purpose of determining registrability of a similar design in Australia: World of Technologies (Aust) Pty Ltd v Tempo (Aust) Pty Ltd (2007) 71 IPR 307. The “prior art base” also includes designs disclosed in published designs applications with an earlier priority date: s 15(2). The priority date is usually the filing date of the design application: s 27. The standards for determining whether the design is new and distinctive are set out in s 16. Under s 16 a design will be “new” unless it is “identical” to an existing design, and it will be “distinctive” unless it is “substantially similar in overall impression” to an existing design. The factors to be considered in assessing “substantial similarity in overall impression” are set out in s 19. In particular, s 19 requires more weight to be given to similarities when comparing the designs than to the differences between them. Further, the standard of the “informed user” is to be applied, that is, “the standard of a person who is familiar with the product to which the design relates, or products similar to the product to which the design relates”: s 19(4). The standard of the “informed user” does not require that the notional person be a user of the products in question: the necessary and only qualification is that the notional person is familiar with those products: Multisteps Pty Ltd v Source and Sell Pty Ltd (2013) 214 FCR 323 at [66]–[70]. The issue of whether a design is “new” and “distinctive” is to be assessed not by comparing the design in question to the prior art base as a whole but by comparing it individually to each relevant piece of prior art. In other words, a design that combines various features each of which can be found in the prior art base when considered as a whole but not in any one particular piece of prior art, is capable of being new or distinctive: LED Technologies Pty Ltd v Elecspess Pty Ltd (2008) 80 IPR 85 at [12] and [55] per Gordon J. The decision in that case that the plaintiff’s registered designs of lenses in combination rear lights for 410 [8.1590]

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motor vehicles were new and distinctive designs which had been infringed by the defendant’s imported products was upheld by the Full Federal Court: Keller v LED Technologies Pty Ltd (2010) 185 FCR 449.

Ownership of a design [8.1610] Basically, the owner of an unregistered design is entitled to be entered on the Register as the registered owner of the design. More particularly, the Designs Act 2003 (Cth) provides that a person in any of the following categories is entitled to be entered on the Register as the registered owner of a design that has not yet been registered: (a)

the person who created the design (the “designer”);

(b)

if the designer created the design in the course of employment, or under a contract, with another person – the other person (that is, the employer or the party who commissioned the design), unless they have agreed to the contrary;

(c)

a person who derives title to the design from a person mentioned in (a) or (b) (for example, under an assignment) or by devolution by will or by operation of law;

(d)

a person who would, on registration of the design, be entitled to have the exclusive rights in the design assigned to the person; or

(e)

the legal personal representative of a deceased person in one of the above categories: s 13(1).

The registered owner of a registered design is the person who, at a particular time, is entered in the Register as the registered owner of the design, or if there are two or more such persons, each of them: s 14(1).

Registration procedure [8.1620] The registration procedure under the Designs Act 2003 (Cth) is significantly different than under the previous legislation. The purpose of the provisions is to streamline the system so that an application for registration of a design will only be examined in the first instance to check that it complies with the formal requirements. The Registrar must register a design if the prescribed formalities are all satisfied: ss 39 – 40. After a formalities check, the application will proceed to grant and publication: s 45. So, essentially an application for design registration will be granted if the forms are correctly completed and official fees paid. In other words, a design application will not be examined before grant. However, any person may request examination of whether a design is new and distinctive (that is, a substantive examination). On receiving a request, for example, by the owner of the design or the order of a court, the Registrar is required to examine a registered design: s 63. [8.1620] 411

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In examining the registered design, the Registrar is to consider whether grounds exist for the revocation of the registration, either because the design is not a registrable design or on the basis of any other ground specified in the regulations: s 65. If a ground of revocation is established, the Registrar may revoke the registration if it is not possible to amend it so as to remove the ground for revocation: ss 66, 68. If the Registrar is satisfied that a ground of revocation has not been made out or that any ground of revocation has been removed, the Registrar issues a certificate of examination as prima facie evidence of the validity of the design registration: s 67. The important point is that a design must have been examined and a certificate of examination granted before the applicant can bring an action for infringement: s 73(3).

Priority date [8.1630] The priority date of a design application is important since it is the date from which design rights are deemed to commence and therefore enabling the registered owner to bring an action for infringement in respect of the registered design. The priority date of a design disclosed in a design application is the filing date of the application: Designs Act 2003 (Cth), s 27(1). The validity of a design is not affected by publication or use after the priority date, or by the registration of a design with the same or a later priority date: s 16(3).

Infringement of a registered design Exclusive rights of a registered owner [8.1640] The owner of a registered design has a number of exclusive rights; these, in short, are the exclusive right to: (a)

make a product which embodies the design;

(b)

import, sell, hire or dispose of such a product;

(c)

use such a product for the purposes of any trade or business;

(d)

keep a product to do any of these things; and

(e)

authorise another person to do any of these things: Designs Act 2003 (Cth), s 10(1).

The registered owner’s exclusive rights are personal property which may be assigned or may devolve by will or operation of law: s 10(2). To be effective, an assignment must be in writing and signed by, or on behalf of, the assignor and the assignee: s 10(2).

Infringement proceedings [8.1650] The registered owner of a registered design may bring proceedings against another person alleging that the person has infringed the registered 412 [8.1630]

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design: Designs Act 2003 (Cth), s 73. The circumstances in which a person will infringe a registered design are set out in s 71(1) which provides: A person infringes a registered design if, during the term of the registration of the design, and without the licence or authority of the registered owner of the design, the person: (a)

makes or offers to make a product, in relation to which the design is registered, which embodies a design that is identical to, or substantially similar in overall impression to, the registered design; or

(b)

imports such a product into Australia for sale, or for use for the purposes of any trade or business; or

(c)

sells hires, or otherwise disposes of, or offers to sell, hire or otherwise dispose of, such a product;

(d)

uses such a product in any way for the purposes of any trade or business; or

(e)

keeps such a product for the purpose of doing any of the things mentioned in paragraph (c) or (d) [emphasis added].

An infringement under s 71(1)(a) is referred to as a “primary” infringement, whereas infringement by conduct falling within s 71(1)(b) – (e) is referred to as a “secondary” infringement. The difference is relevant to the issue of the remedies available for infringement discussed in [8.1670]. Infringement is determined by comparing the allegedly infringing product against the registered design, not by comparing a product embodying the registered design against the infringing product: LED Technologies Pty Ltd v Elecspess Pty Ltd (2008) 80 IPR 85 at [77] per Gordon J.

Meaning of “substantially similar in overall impression” [8.1660] Section 71(1)(a) of the Designs Act 2003 (Cth) (see [8.1650]) refers to a person being liable for infringement where that person makes a product, in relation to which the design is registered, which embodies a design that is: “identical to, or substantially similar in overall impression to, the registered design”. The heads of infringement in s 71(1) (see [8.1650]) basically concern dealings with a product embodying such a design. Section 71(3) provides that in determining whether an allegedly infringing design is “substantially similar in overall impression to the registered design, a court is to consider the factors specified in section 19” (emphasis added). As we saw earlier when discussing the eligibility of a design for registration (see [8.1600]) s 19 requires, inter alia, a person to give more weight to similarities between the designs than the differences between them when deciding whether a design is substantially similar in overall impression to another design. The Act provides that a person does not infringe a registered design by importing a product embodying a design that is identical to or substantially similar in overall impression to the registered design where the product [8.1660] 413

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embodied the design with the licence or authority of the registered owner: s 71(2). In other words, the Act does not prevent the parallel importation of genuine goods. A defendant in infringement proceedings may counter-claim for revocation of the registration of the design under s 93.

Remedies for infringement [8.1670] The relief which a court may grant in infringement proceedings includes: (a)

an injunction; and,

(b)

at the option of the plaintiff – damages or an account of profits: Designs Act 2003 (Cth), s 75(1).

The court may refuse to award damages, reduce the damages that would otherwise be awarded, or refuse to make an order for an account of profits, if the defendant satisfies the court: (a)

(b)

in the case of primary infringement: (i)

that at the time of the infringement, the defendant was not aware that the design was registered; and

(ii)

that before that time, the defendant had taken all reasonable steps to ascertain whether the design was registered; or

in the case of secondary infringement – that at the time of the infringement, the defendant was not aware, and could not reasonably have been expected to be aware, that the design was registered: s 75(2). (For conduct constituting a “primary” infringement and a “secondary” infringement, see [8.1650].)

It is prima facie evidence that the defendant was aware that the design was registered if the product, or the packaging of the product, is marked so as to indicate registration of the design: s 75(4). The court may award such additional damages as it considers appropriate having regard to the flagrancy of the infringement and all other relevant matters: s 75(3). For example, the respondent was ordered to pay $7,500 compensatory damages and $10,000 additional damages for making and selling dresses which were substantially similar in overall impression to the applicant’s registered design for a particular style of dress: Review Australia Pty Ltd v Innovative Lifestyle Investments Pty Ltd (2008) 166 FCR 358.

Duration of a registered design [8.1680] The term of registration of a design under the Designs Act 2003 (Cth) is initially five years from the filing date of the design application with provision for renewal for a further five years, that is, a maximum of 10 years: ss 46, 47. After this time the design will be open for any other person to use. 414 [8.1670]

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Right of repair defence for spare parts [8.1690] One of the more contentious issues in designs law is the extent to which the manufacturer of products requiring replacement parts, for example motor vehicle parts, should be able to obtain, in effect, monopoly protection for such parts by design registration with the potential for high prices being charged. To deal with this issue, the Designs Act 2003 (Cth) provides, in essence, a right of repair defence. A design is not infringed where: (a)

a person uses, or authorises another to use, a product in relation to which the design is registered;

(b)

the product embodies a design that is identical or substantially similar in overall impression to the registered design;

(c)

the product is a component of a complex product; and

(d)

the purpose of the use or authorisation is the repair of the complex product so as to restore its overall appearance in whole or in part: s 72(1).

A “complex product” is a product comprising at least two replaceable component parts (s 10), that is, in effect a product comprising at least two spare parts. In essence, the defence applies where a spare part is being used to repair a complex product. It does not apply where the use of a component part embodying a design results in the enhancement of the appearance of the complex product: s 72(3). “Repair” in this context includes: (a)

restoring or replacing a decayed or damaged component;

(b)

necessarily replacing incidental items at the same time; or

(c)

carrying out maintenance on the complex product: s 72(5).

The onus is on the owner of the design to prove that parts were being used for non-repair purposes: s 72(2). The approach taken by the Designs Act 2003 is aimed at striking a balance between providing an incentive for creative activity in design and enabling competition in the spare parts market.

Registration or publication [8.1700] The Designs Act 2003 (Cth) provides for a design applicant to request publication of their design as an alternative to registration: s 35. Registration gives the creator an exclusive property right in the design, preventing others from applying the design. In contrast, publication does not prevent others from applying the design but prevents them from registering the design for their own exclusive benefit since the design would no longer be new and therefore not registrable. [8.1700] 415

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The reason for the introduction of this novel procedure appears to be that publication may be of advantage to certain industries, for example the textile industry, where because of the large numbers of short-lived designs produced, registration could be too costly.

Relationship between copyright and designs protection [8.1710] In the absence of special provision, it would be possible for some designs to be protected not only as registered designs under the Designs Act 2003 (Cth) but also as artistic works under the Copyright Act 1968 (Cth). For example, the drawing of a chair would constitute a two-dimensional artistic work protected against unauthorised copying by the Copyright Act 1968. The owner of the copyright in the drawing also has the exclusive right to reproduce the drawing in three dimensions; that is, to make a chair in accordance with the drawing: s 21(3). However, the drawing of the chair may also be registrable as a design under the Designs Act 2003 (Cth). If the shape of the chair was registered as a design, then the owner would not only obtain the benefits of registration under the Designs Act 2003 but also the much longer period of protection as an artistic work under the Copyright Act 1968 (Cth). Accordingly, ss 74 – 77 of the Copyright Act 1968 are designed to prevent such dual protection. The present sections are the product of significant amendments by the Designs (Consequential Amendments) Act 2003 (Cth). The amended ss 74 – 77 of the Copyright Act 1968 (Cth) came into operation on 17 June 2004, the same date as the commencement of the Designs Act 2003 (Cth). Their general effect is to remove the possibility of copyright protection for essentially three-dimensional industrial products. Designs for the latter, if they are to be protected at all, must be registrable and be registered under the Designs Act 2003.

Position where the corresponding design is registered [8.1720] Section 75 of the Copyright Act 1968 (Cth) provides that, where copyright subsists in an artistic work and a “corresponding design” has been registered under the Designs Act 2003 (Cth), it is not an infringement of that copyright to reproduce the work by embodying that corresponding design in a product.

Meaning of “corresponding design” [8.1730] “Corresponding design” is defined by s 74(1) of the Copyright Act 1968 (Cth) which provides: corresponding design, in relation to an artistic work, means visual features of shape or configuration which, when embodied in a product, result in a reproduction of that work, whether or not the visual features constitute a design that is capable of being registered under the Designs Act 2003.

The general effect of s 75 of the Copyright Act 1968 (Cth) is to preclude an action for copyright infringement where the artistic work is reproduced by making 416 [8.1710]

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products in accordance with the corresponding design. Protection of the registered design in such a case is provided only under the Designs Act 2003 (Cth), not the Copyright Act 1968 (Cth).

Position where the corresponding design is not registered [8.1740] Section 77 of the Copyright Act 1968 (Cth) deals with the situation where the corresponding design either has not been registered under the Designs Act 2003 (Cth) or is not registrable under that Act. The section applies where: (a)

copyright subsists in an artistic work (other than a building or a model of a building, or work of artistic craftsmanship) whether made before or after the commencement of the section;

(b)

a corresponding design is applied industrially, whether in Australia or elsewhere, by or with the licence of the owner of the copyright in the work;

(c)

products to which the corresponding design has been applied are sold, let for hire, or offered for sale or hire, whether in Australia or elsewhere; and

(d)

at that time, the corresponding design is not registrable under the Designs Act 2003 (Cth), or has not been registered under that Act or under the Designs Act 1906 (Cth): Copyright Act 1968 (Cth), s 77(1).

Where the above criteria are met, then it is not an infringement of the copyright in the artistic work to reproduce the work by embodying the corresponding design in a product: Copyright Act 1968 (Cth), s 77(2)(a). For example, it would not be an infringement of copyright in the drawing of an exhaust pipe (that is, the artistic work) for another manufacturer to copy exhaust pipes made in accordance with the design (that is, the corresponding design) where the latter was either not registrable or not registered under the Designs Act 2003 (Cth).

Meaning of “applied industrially” [8.1750] It will be observed that for s 77 of the Copyright Act 1968 (Cth) to apply, the corresponding design must have been “applied industrially”. A design is deemed to have been applied industrially if it is applied to more than 50 articles, or to one or more articles (other than handmade articles) manufactured in lengths or pieces: Copyright Regulations 1969 (Cth), reg 17(1). However, this is not an exhaustive definition and hence there may be an industrial application of a design for the purposes of s 77 of the Copyright Act 1968 (Cth) even where the plaintiff has made fewer than 50 articles in accordance with her or his design: Shacklady v Atkins (1994) 30 IPR 387 at 393.

Exceptions to the operation of s 77 of the Copyright Act 1968 [8.1760] It is important to note the exceptions to the operation of s 77 of the Copyright Act 1968 (Cth): [8.1760] 417

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1.

2.

Section 77 does not apply to works of artistic craftsmanship (for the meaning of this expression, see [8.190]. Accordingly, even where a work of artistic craftsmanship is industrially applied, the artist will still retain full copyright protection where the work has not been registered, or is not registrable under the Designs Act 2003 (Cth). The section does not apply to a building or model of a building. 30

3.

The section does not apply in relation to any articles in respect of which, at the time when they were sold or hired, the corresponding design was excluded from registration by regulations made under the Designs Act 2003: Copyright Act 1968 (Cth), s 77(3). There are currently no relevant provisions in this context in the Designs Regulations 2004 (Cth).

4.

The section would not appear to apply to two-dimensional “surface” designs applied to products, for example, the artwork for a Christmas card or the drawing of a design applied to T-shirts, which will therefore retain copyright protection as artistic works. The reason is that for the s 77 defence to apply there must be a “corresponding design”. The definition of “corresponding design” in s 74(1) (see above [8.1730]) refers to visual features of shape or configuration “embodied in” a product, which expression includes “woven into, impressed on or worked into the product” (s 77(2)) The Federal Court has held that artwork embroidered by the plaintiff on its swimwear was not “embodied in” the swimwear. Accordingly, the defendant could not rely on the s 77 defence when it substantially reproduced the artwork on its own swimwear and was held liable for compensatory and additional damages for infringement of copyright in the original artistic work: Seafolly Pty Ltd v Fewstone Pty Ltd (2014) 313 ALR 41; cf Polo/Lauren Co LP v Ziliani Holdings Pty Ltd (2008) 173 FCR 266 (FCAFC). 31

The Copyright Act 1968 (Cth) also provides a defence to copyright infringement for certain reproductions of artistic works made in the course of, or incidental to, products that do not themselves infringe copyright: s 77A.

Summation of the basic position [8.1770] In summary, protection for the design of a three-dimensional industrial product must be obtained by registration of the design under the Designs Act 2003 (Cth), subject to the limited exceptions mentioned at [8.1760]. If the design is either not registered, or is not registrable under that Act, copyright law will not fill the gap, that is, will not provide a right of action against those who copy the design of another’s product: compare Digga Australia Pty Ltd v Norm Engineering Pty Ltd (2008) 166 FCR 268 (FCAFC). 30 31

Section 77(5) of the Copyright Act 1968 (Cth) provides that a building or model of a building “does not include a portable building such as a shed, a pre-constructed swimming pool, a demountable building or similar portable building”. See J Luck, “Section 18 of the Designs Act 2003: The neglected copyright/design overlap provisions” (2013) 23 Australian Intellectual Property Journal 68.

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PATENTS The Patents Act 1990 [8.1780] The protection of new inventions by way of the grant of a patent is regulated by the Patents Act 1990 (Cth) and the Patents Regulations 1991 (Cth). Patents are granted for a very wide range of inventions including new mechanical products and chemical and biological products and processes. The Patents Act 1990 (Cth) was significantly amended by the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 (Cth) to address concerns, inter alia, that the threshold for the grant of patents was too low. The general effect of the provisions is to raise the quality of patents which are granted by increasing the threshold of patentability of inventions and requirements for a valid patent specification. The amendments are intended to raise the standard set in Australia to a level that is more consistent with that of our major trading partners. The new provisions of the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 (Cth) concerning the patentability and validity of patents came into operation in respect of patent applications filed after 15 April 2013, or for which examination of the patent is requested after that date: they do not apply to patent applications for which examination of the patent was requested prior to 15 April 2013 to which the previous law still applies. Certain provisions, more particularly those providing for access to patented inventions for experimental purposes (see [8.2115]) commenced on 15 April 2012. The discussion of patent law which follows is based on the provisions of the Patents Act 1990 (Cth) as amended by the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 (Cth) and the Patents Regulations 1991 (Cth) as amended by the Intellectual Property Legislation Amendment (Raising the Bar) Regulation 2013 (Cth).

The nature of a patent [8.1790] A patent is a temporary monopoly granted by the Crown to a patentee in return for the disclosure of an invention to the public in the form of a patent specification. It gives the owner, that is, the patentee, the right to prevent others from exploiting her or his invention in Australia for a limited period. The basic rationale behind the patent system is to stimulate technical development, and hence promote industry, by offering the opportunity of acquiring exclusive rights in an invention for a limited period. The grant of a patent is said to be a kind of bargain between the inventor and the state in that, in consideration for the grant of letters patent, the applicant must disclose her or his invention by lodging at the Patent Office a patent specification clearly describing what he or she has invented. Subsequently, the specification will become open to public inspection and the invention then becomes public knowledge. In return for the disclosure, the patentee enjoys the exclusive right to exploit the invention during the term of [8.1790] 419

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the patent. In other words, the patentee is given a monopoly on her or his invention for the term of the patent. On expiry of the patent, the invention becomes public property and may be freely used by anybody. There are two types of patent that can be granted under Australian patent law, namely: (a)

a standard patent; and

(b)

an innovation patent.

The term of a standard patent is 20 years from the date of the patent (that is, the date of filing the complete specification): Patents Act 1990 (Cth), ss 67, 65. The term of an innovation patent is eight years from the date of the patent: s 68. The principal differences between standard and innovation patents are more appropriately considered later in this topic: see [8.2060]-[8.2090].

Subject matter of a patent [8.1800] In order for an invention to be patentable, it must satisfy certain requirements. The Patents Act 1990 (Cth), s 18(1) provides that: [A]n invention is a patentable invention for the purposes of a standard patent if the invention, so far as claimed in any claim: (a)

is a manner of manufacture within the meaning of section 6 of the Statute of Monopolies; 32 and

(b)

when compared with the prior art base as it existed before the priority date of that claim: (i)

is novel; and

(ii)

involves an inventive step; and

(c)

is useful; and

(d)

was not secretly used in the patent area before the priority date of that claim.

It will be seen from that section that the basic requirements for an invention to be patentable as a standard patent are that it must: (a)

be a manner of manufacture;

(b)

be novel, that is, new;

(c)

involve an inventive step;

(d)

be useful; and

32

The Statute of Monopolies 1624 (IMP) declared all monopolies void but specifically exempted the grant of letters patent for an invention. Thus, s 6 provided that the declaration of invalidity contained in the preceding section of the statute: “shall not extend to any letters patents and grants of privilege … hereafter to be made, of the sole working or making of any manner of new manufactures within this Realm, to the true and first inventor and inventors of such manufactures, which others at the time of making such letters patents and grants shall not use, so as also they be not contrary to the law or mischievous to the State, by raising prices of commodities at home or hurt of trade, or generally inconvenient”.

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not have been secretly used.

Each of these requirements is discussed at [8.1820]–[13.1920]. However, before doing so, it is necessary to consider the threshold requirement of patentability.

Threshold requirement [8.1810] The High Court held in NV Philips Gloeilampenfabrieken v Mirabella International Pty Ltd (1995) 183 CLR 655 that, in order to be patentable, the subject matter of a claim must first satisfy the threshold requirement imposed by traditional principles of patent law, that is, that the claim must disclose a manner of new manufacture. Accordingly, if it is apparent on the face of the relevant patent specification that the subject matter of the claim is, by reason of the absence of the necessary quality of inventiveness, not a manner of new manufacture, the alleged invention is not patentable. It is only if the latter requirement is satisfied that it is necessary to then consider the further requirements of novelty, inventive step and so on: compare Advanced Building Systems Pty Ltd v Ramset Fasteners (Aust) Pty Ltd (1998) 194 CLR 171.

Manner of manufacture [8.1820] The question of whether the subject matter of an invention concerns a manner of manufacture has occupied the courts on many occasions, since on the interpretation of that expression will often depend the patentability of the invention claimed. 33 To constitute a manner of manufacture the invention must relate to something tangible in a commercial sense. Thus, mere discoveries, theoretical principles, or information per se are not patentable: some practical application of the discovery or theoretical principle with an economically significant result must be shown. On the other hand, the expression “manner of manufacture” covers not only a new product, for example a new article, contrivance or substance, but also a new method or process. The leading decision in this area is that of the High Court of Australia in National Research Development Corp v Commissioner of Patents (1959) 102 CLR 252, where a method of eradicating weeds from a growing crop by spraying with a selective weed killer was held to be patentable.

Methods of medical treatment [8.1830] Formerly, methods of surgery and processes for treating diseases of the human body were considered to be outside the concept of invention. However, the Full Federal Court subsequently determined in two cases (although strictly obiter) that a new method of medical treatment is patentable: 33

The requirement under the Patents Act 1990 (Cth), s 18(1) is essentially the same in this respect as that under the former Patents Act 1952 (Cth). [8.1830] 421

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Anaesthetic Supplies Pty Ltd v Rescare Ltd (1994) 50 FCR 1; Bristol-Myers Squibb Co v FH Faulding & Co Ltd (2000) 97 FCR 524. The High Court (by a majority of 4:1) confirmed that a method of medical treatment is patentable in Australia: Apotex Pty Ltd v Sanofi-Aventis Australia Pty Ltd (2013) 253 CLR 284. More particularly, the majority upheld the validity of the respondents’ patent for a new method of medical treatment of a disease by use of a known drug. French CJ said (at [50]): “The exclusion from patentability of methods of medical treatment represents an anomaly for which no clear and consistent foundation has been enunciated. Whatever views may have been held in the past, methods of medical treatment, particularly the use of pharmaceutical drugs, cannot today be conceived as ‘essentially non-economic’… In my opinion the application of the rubric ‘manner of new manufacture’ in a logically and normatively coherent way is not served by excluding from its scope methods of medical treatment of human beings. Methods of medical treatment can fall within the scope of a manner of new manufacture within the meaning of s 6 of the Statute and therefore within s 18(1)(a) of the 1990 Act”: see similarly at [276]–[286] per Crennan and Kiefel JJ.

Biological processes [8.1840] Biological processes and their products are patentable. On the other hand, the Patents Act 1990 (Cth), s 18(2) provides that: “Human beings, and the biological processes for their generation, are not patentable inventions.” 34 Naturally occurring DNA and RNA sequences (that is, nucleic acids encoding genes) as they exist inside the human body cannot be the subject of a valid patent. By contrast, a full bench of the Federal Court in D’Arcy v Myriad Genetics Inc [2014] FCAFC 115 recently held unanimously that an isolated nucleic acid, the so-called “breast cancer gene”, BRCA1, is patentable. In its joint judgment, the Court (Allsop CJ, Dowsett, Kenny, Bennett and Middleton JJ) said (at [215]): “It is the chemical changes in the isolated nucleic acid which are of critical importance, as this is what distinguishes the product as artificial and economically useful.”

The Court concluded (at [218]): “The isolated nucleic acid, including cDNA, has resulted in an artificially created state of affairs for economic benefit. The claimed product is properly the subject of letters patent. The claim is an invention within the meaning of s 18(1) of the Act.”

The Court declined to follow the decision of the United States Supreme Court in Association for Molecular Pathology v Myriad Genetics Inc 596 US 12-398 (2013) where, on similar facts, the Supreme Court held that a naturally occurring DNA segment is a product of nature and not patent eligible merely because it 34

See E O’Sullivan, “The Patentability of Human Embryonic Stem Cells in Australia and Europe: Section 18(2) Reconsidered in Light of Brüstle v Greenpeace eV” (2013) 24 Australian Intellectual Property Journal 18; C Lawson, “’Human Beings’ as Excluded Subject Matter for the Purposes of the Patents Act 1990 (Cth)” (2009) 20 Australian Intellectual Property Journal 223.

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had been isolated. An application has been made for special leave to appeal to the High Court from the decision in D’Arcy v Myriad Genetics Inc [2014] FCAFC 115. Case study [8.1845] The respondent, the United States biotechnology corporation Myriad Genetics Inc, had been granted a patent in respect of claims to an isolated nucleic acid, the so-called “breast cancer gene”” BRCA1. The appellant D’Arcy, a breast cancer survivor, challenged the validity of the patent claims on the basis that genes were naturally occurring in the human body and so were “discovered” rather than “invented” and therefore were not patentable. Myriad Genetics Inc., contended that an isolated nucleic acid was chemically, structurally and functionally different to naturally occurring DNA. The High Court (French CJ, Kiefel, Bell, Gageler, Keane, Nettle and Gordon JJ) held unanimously (reversing the decisions of the Full Federal Court and the Federal Court) that in so far as the claims in the patent were for an isolated nucleic acid they did not disclose a patentable invention. Genetic information was not something that was “made” or “artificially created”. Consequently, the patent claims did not satisfy the requirement in s 18(1)(a) of the Patents Act 1990 (Cth) that the invention as claimed be a “manner of manufacture” within the meaning of that expression. As regards claim 1 of the patent, Gageler and Nettle JJ said (at [168]-[169]): “It is a claim for a monopoly over such isolated fragments of naturally occurring DNA as comprise the BRCA1 gene as are found upon examination to contain the (naturally occurring) specified mutations and polymorphisms. 35 In the result the claim extends too far…[T]he first respondent has attempted to patent those sequences of the gene themselves notwithstanding that, even when isolated, they are naturally occurring and therefore not new.” The claims in dispute were held to be invalid and an order made for their revocation: D’Arcy v Myriad Genetics Inc (2015) 89 ALJR 924.

Computer programs [8.1850] Computer programs per se are not patentable, although a computer program-related invention is patentable. For example, an application to patent a method of producing an improved curved image used in computer graphics displays was held to disclose patentable subject matter: International Business Machines Corp v Commissioner of Patents (1991) 33 FCR 218. See similarly, CCOM Pty Ltd v Jiejing Pty Ltd (1994) 51 FCR 260 (the storage and retrieval of Chinese characters represented on a computer screen for word processing held by the 35

“A polymorphism is a genetic variant which has arisen in a distant common ancestor and is therefore not unique to an individual or that individual’s immediate family. Forty per cent of women in the general female population have one or more polymorphisms in the BRCA1 gene that are not found in the remaining 60% of the population” (at [207] per Gordon J). [8.1850] 423

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Full Federal Court to be patentable); and RPL Central Pty Ltd v Commissioner of Patents [2013] AIPC 92-458; [2013] FCA 871 (a method of gathering evidence for the purpose of assessing an individual’s competency relative to a recognised qualification standard held to be patentable subject matter).

New plant varieties [8.1860] New plant varieties are patentable provided that the other requirements as to patentability discussed at [8.1870]–[8.1920] are satisfied. It should also be observed in this context that an alternative method of protection for new varieties of plants is provided by a separate piece of legislation, namely, the Plant Breeder’s Rights Act 1994 (Cth). The plant breeder’s right (PBR) obtained under the latter Act lasts for 25 years in the case of trees and vines, and 20 years for any other plant variety: s 22.

Novelty [8.1870] The essential purpose behind the requirement of novelty is that a patent should not be granted for inventions that are already known. In other words, once the public has been made aware of an invention, a subsequent patent cannot be granted for it or, if granted, is invalid. To say that an invention, or a claim in a complete specification, lacks novelty is, in essence, to say that a claim or claims of the patent specification includes something that has already been published or used before the priority date of the claim. The claim is then said to have been anticipated by the prior publication or the prior user, that is, to have been anticipated by the prior art. The Patents Act 1990 (Cth) provides that the novelty of each claim in a complete specification is to be assessed against the prior art base as it existed immediately before the priority date of the claim: s 18(1)(b)(i). This requires an explanation of the meaning of “prior art base”.

Prior art base [8.1880] The “prior art base” is defined in the Dictionary in Sch 1 of the Patents Act 1990 (Cth) to include information in a document that is publicly available whether in or out of the patent area (that is, Australia): in other words, novelty is assessed by reference to information in a document anywhere in the world. In addition, “prior art base” also includes information made publicly available through doing an act whether in or out of the patent area: that is, in assessing novelty against alleged prior use of the invention regard is given to prior use of the invention anywhere in the world.

Assessment of novelty [8.1890] In determining the question of novelty, the Patents Act 1990 (Cth) provides that an invention is to be taken as novel when compared with the prior art base unless it is not novel in the light of any one of the following categories of information, each of which must be considered separately: 424 [8.1860]

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(a)

information made publicly available in a single document or through the doing of a single act;

(b)

information made publicly available in two or more related documents, or through the doing of two or more related acts, if the relationship between the documents or acts is such that a person skilled in the relevant art would treat them as a single source of information; and

(c)

information contained in a single, published patent specification which was filed but not published at the priority date of the claim under consideration: s 7(1).

Where it is contended that a claim lacks novelty because of a prior publication, the general proposition is that the prior document must disclose all the essential integers, that is, features, of the claim to a person skilled in the relevant area: Nicaro Holdings Pty Ltd v Martin Engineering Co (1990) 91 ALR 513. Broadly: “The concept of novelty in Australia involves a comparison between the invention as claimed in the claims of the patent and prior art information. Often, this must be determined by looking to prior publications which are to be read by the skilled addressee to determine what they disclose”: H Lunbeck A/S v Alphapharm Pty Ltd (2009) 177 FCR 151 at [178] per Bennett J.

The learned judge added (at [182]): “If the prior art discloses some but not all integers of a claimed patent to a product, such as a combination, there is anticipation [that is, a lack of novelty] if the skilled addressee would add the missing information as a matter of course and without the application of inventive ingenuity or undue experimentation: Nicaro 91 ALR 530-1”: see similarly, SNF (Australia) Pty Ltd v Ciba Specialty Chemicals Water Treatments Ltd (2012) 204 FCR 325 at [321].

It has been held that what is disclosed to the skilled addressee is to be judged as at the date of publication of the prior art information (for example, the earlier patent specification) and not the date of the claim in the patent specification at issue, although the authorities appear to be divided on the question: Bradken Resources Pty Ltd v Lynx Engineering Consultants Pty Ltd (2012) 210 FCR 21 at [210]–[214]. Earlier disclosure of the same invention in a document (for example, a patent specification) even if in a foreign language will result in lack of novelty (Dennison Manufacturing Co v Monarch Marketing Systems Inc (1983) 66 ALR 265), as will publication of photographs in a magazine if enough detail is shown: Van der Lely NV v Bamfords Ltd [1963] RPC 61. Prior public use of the invention by others who had earlier created the same device will result in a lack of novelty: Windsurfing International Inc v Petit (1983) 3 IPR 449. On the other hand, to establish lack of novelty through the doing of a single act under s 7(1)(a) (see above), it is necessary to establish that the information made “publicly available” by the doing of that act, for example the display of a product, extended to each of the essential integers of the patent claim: Damorgold Pty Ltd v JAI Products Pty Ltd (2015) 229 FCR 68 (FCAFC). [8.1890] 425

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The test applied by the courts in determining whether an invention lacks novelty is what is known as the “reverse infringement test”. In Meyers Taylor Pty Ltd v Vicarr Industries Ltd (1977) 137 CLR 228 at 235, this test was stated by Aickin J as follows: “The basic test for anticipation or want of novelty is the same as that for infringement and generally one can properly ask oneself whether the alleged anticipation would, if the patent were valid, constitute an infringement.”

In other words, if the prior publication contained a description of the invention that would have constituted an infringement if performed, or if the prior use would constitute an infringement of the patent if valid, the invention has been anticipated by the prior publication or prior use and accordingly lacks novelty. The previous position was that disclosure of an invention to a single person before the priority date with no restrictions on the use that could be made of the invention would anticipate the patent and result in its invalidity on the ground of lack of novelty: Re Bristol-Myers Company’s Application [1969] RPC 146. However, a “grace period” now applies in respect of any information made publicly available by or with the consent of the patentee provided that a complete specification for the invention is made within 12 months: s 24(1). 36

Inventive step [8.1900] It is not sufficient for an invention to be novel in order to be patentable: it must also involve an inventive step. 37 In determining the issue of inventive step consideration needs to be given to the prior art base (discussed at [8.1880]), that is, to information publicly available in a document, or the doing of acts, either in Australia or anywhere else in the world. However, not all information so disclosed is taken into account in deciding whether the invention involves an inventive step. Following amendment by the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 (Cth), the Patents Act 1990 (Cth) provides that an invention is to be taken to involve an inventive step when compared with the prior art base unless the invention would have been obvious to a person skilled in the relevant art in the light of the common general knowledge as it existed whether inside or outside of Australia 38 before the priority date of the relevant claim in the specification, whether that knowledge is considered separately or together with the information described in s 7(3) of the Patents Act 1990 (Cth): s 7(2). In other words, only those disclosures which form part of the common general 36

37 38

The grace period is in addition to the protection already afforded to applicants who have previously disclosed their invention under certain specified prescribed circumstances such as: the showing of the invention at a recognised exhibition; disclosure in a paper read before a learned society; or the working of the invention within 12 months for the purpose of reasonable trial: Patents Act 1990 (Cth), s 24(1) and the Patents Regulations 1991 (Cth), regs 2.2 – 2.2D. The alternative way of expressing this requirement, in the language of the now repealed Patents Act 1952 (Cth), is that the invention must not be obvious. Prior to the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 (Cth), the common general knowledge of the person skilled in the field was limited to that existing within Australia.

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knowledge of those skilled in the relevant field are relevant, either separately or together with the additional information specified in s 7(3). The additional information that can be taken into consideration under s 7(3) is: (a)

any single piece of prior art information (that is, information in a document or the doing of an act); or

(b)

a combination of any two or more pieces of prior art information that the skilled person could be reasonably expected to have combined.

Where there is more than one piece of prior art information, each may be considered separately in conjunction with the common general knowledge to determine whether the invention claimed involves an inventive step. For example, in AstraZeneca AB v Apotex Pty Ltd (2015) 89 ALJR 798, the High Court affirmed the revocation of a patent for a method of treatment of high blood cholesterol using low doses of a particular compound on the ground of a lack of inventive step under s 7(2) because the claimed invention was obvious to a person skilled in the relevant art in light of common general knowledge in conjunction with either of two prior art publications, namely, a European patent and a Japanese journal article under s 7(3). Prior to the Patents Act 1990, the notion of common general knowledge was described as the general body of knowledge known or used by all those in the relevant trade, and as such formed the background knowledge and experience which was available to all in the trade in considering the making of new products or the making of improvements in old products: Minnesota Mining & Manufacturing Co v Beiersdorf (Aust) Ltd (1980) 144 CLR 253 at 292; Winner v Ammar Holdings Pty Ltd (1993) 41 FCR 205. Factors to be considered include whether the skilled person would have understood and appreciated the relevance of the prior art to the problem the invention was seeking to solve. The basic issue is whether the invention would have been obvious to a skilled, non-inventive worker in the field, equipped with such knowledge. In other words, would it have been obvious to such person to take the same steps as the inventor if faced with the same problem? If so, the invention will lack the necessary requirement that it involve an inventive step. On the other hand: “When skilled, non-inventive persons, and in this case also a skilled inventive person … looking for improvements, fail to arrive at the invention, it is impossible to suggest that it would have been obvious to the skilled and not necessarily inventive person”: Lockwood Security Products Pty Ltd v Doric Products Pty Ltd (No 2) (2007) 235 CLR 173 at [119]. On the quantum of inventiveness required it has been said that: “The inventive element needed to sustain a patent may be small. A ‘scintilla of inventiveness’ is sufficient. … However, while a simple idea may be inventive, it is nevertheless essential for the validity of a patent that there be some inventiveness”: Aktiebolaget Hässle v Alphapharm Pty Ltd (2000) 51 IPR 375 at [31].

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The invention must be “useful” [8.1910] The requirement that the invention must be useful in order to be patentable has been construed as meaning that the result claimed can be achieved by following the instructions in the specification, in other words, that what is claimed actually works. For example, a plaintiff’s patent for a sailboard used for windsurfing was held invalid on the ground, inter alia, of lack of utility because the claims in the specification included a method of working the invention which would not produce the results mentioned in the specification: Windsurfing International Inc v Petit (1983) 3 IPR 449. Following amendment by the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 (Cth), the Patents Act 1990 (Cth), s 7A provides that: (1)

An invention is taken not to be useful unless a specific, substantial and credible use for the invention (so far as claimed) is disclosed in the complete specification.

(2)

The disclosure in the complete specification must be sufficient for that specific, substantial and credible use to be appreciated by a person skilled in the relevant art.

Secret use [8.1920] The Patents Act 1990 (Cth) requires that for an invention to be patentable, it must not previously have been secretly used. The rationale behind the provision is that where the actual inventor has secretly used her or his invention prior to applying for a patent, then to allow the patent to continue may give the inventor a longer monopoly than the statutory period as a result of the earlier secret use of the invention before the grant of the patent. “Secret use” involves some element of deliberate concealment of the invention: Bristol-Myers Co v Beecham Group Ltd [1974] AC 646. The Patents Act 1990, s 9 provides that the following acts do not constitute a secret use of the invention: (a)

use for the purpose of reasonable trial and experiment only;

(b)

use pursuant to a confidential disclosure;

(c)

use of the invention for a purpose other than trade or commerce;

(d)

use by a Commonwealth, State or Territory authority to whom the patentee has disclosed the invention; and

(e)

any use of the invention by or on behalf of the patentee for any purpose, if a complete application is made for the invention within the “prescribed period”, that is, within 12 months of filing a complete patent application: Patents Regulations 1991 (Cth), reg 1.6. This significant additional exception to secret use was introduced following amendment of the Patents Act 1990 by the Intellectual Property Laws Amendment (Raising the Bar) Act 2012.

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Procedure for obtaining a patent Persons who may be granted a patent [8.1930] Any person or group can apply for a patent but must nominate a person, either an individual or body corporate, who is eligible to be granted the patent. The Patents Act 1990 (Cth) limits the class of persons to whom a patent can be granted. The potential grantee must be a person who: (a)

is the inventor; or

(b)

would, on the grant of a patent for the invention, be entitled to have the patent assigned to her or him;

(c)

derives title to the invention from either of the above (for example, an assignee); or

(d)

is the legal representative of a deceased person who falls into one of the above categories: s 15.

The provision under (b) above, is primarily intended to cover employment or service contracts under which an employer may be entitled to have assigned to them rights in inventions made by their employees: see “Employee Inventions” at [8.2150]. Most patents are owned by corporations as persons entitled to take an assignment from the actual inventor.

Application for a patent [8.1940] An application for a patent is made to the Patent Office in Canberra or to one of its sub-offices in each of the State capital cities. A person may apply for a patent by filing in accordance with the Patent Regulations 1991 (Cth) a patent request and such other documents as are prescribed: Patents Act 1990 (Cth), s 29(1). A patent request is a form which identifies the applicant, the nominated person (that is, the person nominated to be granted a patent), the inventor, the type of application (that is, whether it is for a complete specification or a provisional specification, and whether it is for a standard patent or an innovation patent), and lists any earlier associated provisional applications. The application for a patent may be a provisional application or a complete application: s 29(2). A patent request in relation to a provisional application must be accompanied by a provisional specification: s 29(3). A patent request in relation to a complete application must be accompanied by a complete specification: s 29(4). A complete specification should also be accompanied by a notice of entitlement which sets out the relationship between the person nominated for the grant of a patent and the inventor. A complete specification must also be accompanied by an abstract of the invention.

Specifications [8.1950] In essence, the purpose of a patent specification is to describe the invention. A specification is extremely important in the patent procedure and [8.1950] 429

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needs to be carefully drafted since the value and validity of a patent that may be subsequently granted will to a large extent depend on the competence with which the specification has been prepared. Accordingly, patent specifications are usually drafted by a patent attorney who specialises in this kind of work.

Provisional specification [8.1960] As indicated at [8.1940], a provisional application must be accompanied by a provisional specification: Patents Act 1990 (Cth), s 29(3). The Patents Act 1990 (Cth) as amended by the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 (Cth) provides that: A provisional specification must disclose the invention in a manner which is clear enough and complete enough for the invention to be performed by a person skilled in the relevant art: s 40(1).

A provisional application and specification will lapse unless a complete application and a complete specification are filed within 12 months of the filing of the provisional application: ss 38, 142(1), Patents Regulations 1991 (Cth), reg 3.10. The advantage of a provisional application is that it gives the applicant a further 12 months for further development of their invention before a complete application has to be filed. In essence, the purpose of a provisional specification is to establish a priority date for the invention, that is, to establish a priority date for the claims made subsequently in a complete specification (priority dates are discussed further at [8.1990]).

Complete specification [8.1970] As mentioned at [8.1940], a complete application must be accompanied by a complete specification: Patents Act 1990 (Cth), s 29(4). The complete specification forms the basis for the grant of a patent. The Patents Act 1990, s 40(2), as amended by the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 (Cth) provides that a complete specification must: (a)

disclose the invention in a manner which is clear enough and complete enough for the invention to be performed by a person skilled in the relevant art;

(b)

disclose the best method known to the applicant of performing the invention; and

(c)

where it relates to an application for a standard patent – end with a claim or claims defining the invention.

The specification of a complete application must include a precise technical statement of what is claimed to be the invention and be sufficient for a person who knows the technology involved to put into practical effect. If the complete specification does not comply with these requirements, for example if it fails to 430 [8.1960]

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disclose to those who might wish to make the product after the patent expires how the product should be constructed, then if a patent is granted it will be invalid and may be revoked.

Claims in a complete specification [8.1980] The object of the claims in a patent specification is to define the exact scope of the protection sought by the patent, if granted, and the field from which the patent will seek to exclude others. The claim or claims in the complete specification must be clear and succinct and supported by matter disclosed in the specification: Patents Act 1990 (Cth), s 40(3). 39 The claim or claims must relate to one invention only: s 40(4). A patent will only protect what is claimed in the complete specification.

Priority dates [8.1990] The purpose of a provisional application and provisional specification is to establish a priority date for the claims made subsequently in a complete specification. One of the important features of the Patents Act 1990 (Cth) is the notion of priority dates since the rights of the patentee, if the patent is granted, will operate from this date and, for example, give the patentee priority over any later application. The general position is that the priority date of a claim of a complete specification is the date of filing the complete specification in the Patent Office. However, following amendment by the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 (Cth) where a provisional specification discloses the invention in the claim in a manner that is clear enough and complete enough for the invention to be performed by a person skilled in the relevant art, the priority date of the claim in the complete specification will be the date of making the provisional application: Patents Act 1990 (Cth), s 43(2)(b). Thus, where a provisional application for a patent is made, the provisional specification should contain a clear description of the main essentials of the invention since the priority date of claims in the complete specification depends on whether there is sufficient disclosure of the invention in the provisional specification. The Patents Act 1990 provides that a patent is not invalid, so far as the invention is claimed in any claim, merely because of the publication or use of the invention on or after the priority date of the claim, or the grant of another patent which claims the invention in a claim of the same or a later priority date: s 23.

Examination [8.2000] An examination of a patent request relating to a complete application with its accompanying complete specification must be conducted by a patent 39

Prior to amendment by the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 (Cth), the Patents Act 1990 (Cth), s 40(3) required that the claims must be “fairly based” on the matter described in the specification. [8.2000] 431

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examiner before a standard patent may be granted. There is no automatic examination of patent applications and such examination will only be conducted at the request of the applicant: Patents Act 1990 (Cth), s 44(1). The basic position is that an application will lapse if a request for examination is not made within five years from the filing date of the complete application, or within two months after notice of direction to request such examination by the Commissioner of Patents: ss 44(2), 142(2); Patents Regulations 1991 (Cth), regs 3.15, 3.16. Where a request for examination is made, the patent request and complete specification are referred to a patent examiner. The examiner will report, inter alia, on whether the specification complies with the requirements of the Patents Act 1990 (Cth) and whether it satisfies the criteria of a patentable invention (that is, whether it is a manner of manufacture, is novel, involves an inventive step and is useful under s 18(1)(a), (b) and (c)): s 45. Broadly, one of the principal functions of the patent examiner is to report on whether the patent application and specification has, in essence, been anticipated by the prior art, for example lacks novelty or an inventive step in the light of earlier patent specifications. The examiner will conduct a search of such material. Should the examiner report adversely to the patent application the applicant may seek leave from the Commissioner of Patents to make amendments to overcome the examiner’s objections: s 104. When an examiner is satisfied that there are no further objections and has issued a clear report, the application is ready for acceptance.

Acceptance and publication [8.2010] The Commissioner must accept a patent request and complete specification if the Commissioner is satisfied, on the balance of probabilities, that the specification complies with the requirements of the Patents Act 1990 (Cth) (see [8.1970]); satisfies the criteria of a patentable invention (namely, that it is a manner of manufacture, is novel, involves an inventive step and is useful under s 18(1)(a), (b) and (c)) and complies with any other matters that may be prescribed by the regulations: s 49(1). This does not mean that the patent is then automatically granted; it simply means that the Commissioner is prepared, in the absence of objections from interested persons, to grant a patent. Once the patent request and complete specification are accepted, the applicant is notified of such, and a notice of the acceptance is published in the Australian Official Journal of Patents, Trade Marks and Designs. If the patent request and complete specification have not already become open to public inspection, the notice must include a statement to the effect that the patent request and complete specification are open to public inspection: s 49(5), (6)(b). The general public is thereby notified that the Commissioner is ready to grant the patent unless the grant of the patent is opposed. The patent documents may have become open to public inspection at an earlier date. Thus, the complete specification normally becomes open to public 432 [8.2010]

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inspection 18 months after the date of the filing of the specification, or 18 months from the earliest provisional application associated with the complete specification: s 54(3); Patents Regulations 1991 (Cth), reg 4.2(3). An applicant may also request that the patent documents become open to public inspection at an earlier date: Patents Act 1990 (Cth), s 54(1); Patents Regulations 1991 (Cth), reg 4.2(2).

Grounds of opposition to the grant of a standard patent [8.2020] Once the application for a standard patent becomes open to public inspection, it is likely to be scrutinised by competitors who may decide to oppose the grant of the patent. Thus, a person may oppose the grant of a standard patent by giving notice of opposition within three months of publication in the Official Journal of the Commissioner’s notice of acceptance of the patent request and complete specification: Patents Act 1990 (Cth), s 59; Patents Regulations 1991 (Cth), reg 5.4(1). Section 59 of the Patents Act 1990 (Cth) provides that the only grounds on which a patent may be opposed are: (a)

that the nominated person is either: (i)

not entitled to a grant of a patent for the invention; or

(ii)

entitled to a grant of a patent for the invention but only in conjunction with some other person;

(b)

that the invention is not a patentable invention; or

(c)

the complete specification does not comply with the requirements of s 40(2), (3): see [8.1970]-[8.1980].

The parties will argue the matter before the Commissioner: s 60. If the Commissioner is satisfied, on the balance of probabilities, that a ground of opposition to the grant of the standard patent exists, the Commissioner may refuse the application: s 60(3A). An appeal lies to the Federal Court against a decision of the Commissioner: s 60(4); Bradken Resources Pty Ltd v Lynx Engineering Consultants Pty Ltd (2012) 210 FCR 21. The Patents Regulations 1991 (Cth) contain detailed provisions regarding the procedural requirements in respect of opposition proceedings: regs 5.5 – 5.26.

Re-examination [8.2030] The Patents Act 1990 (Cth) provides for the re-examination of a patent in certain circumstances. If, after acceptance of an application, the Commissioner becomes aware of information which may affect the validity of the patent were it to be granted, the Commissioner may re-examine the complete specification: s 97(1). Furthermore, even where a patent has been granted the Commissioner may re-examine the complete specification and must do so if asked by the patentee or any other person: s 97(2). Where the validity of a patent is disputed in court proceedings, the court may direct the [8.2030] 433

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Commissioner to re-examine the complete specification: s 97(3). The reexamination must be carried out in accordance with the regulations: s 97(3A). On re-examining a complete specification, the Commissioner must ascertain and report on whether the complete specification complies with the requirements of s 40(2), (3) (see [8.1970]-[8.1980]) and whether to the best of his or her knowledge, the invention, so far as claimed, satisfies the criteria mentioned in s 18(1)(a), (b) and (c) (namely, that it is a manner of manufacture, novel, involves an inventive step and is useful): s 98. The Commissioner may refuse to grant a patent if the Commissioner: (a) (b)

makes an adverse report on a re-examination of the relevant specification under s 97(1) (that is, after acceptance of an application); and is satisfied, on the balance of probabilities, that there is a lawful ground of objection to the specification: s 100A(1).

Further, the Commissioner may, by notice in writing, revoke a patent, either wholly or so far as it relates to a particular claim, if the Commissioner: (a) makes an adverse report on a re-examination of the relevant specification under s 97(2) (that is, after a patent has been granted); and (b) is satisfied, on the balance of probabilities, that there is a lawful ground of objection to the relevant specification: s 101(1). An appeal lies to the Federal Court against a decision of the Commissioner under these provisions.

Grant, date, and term of a standard patent [8.2040] If there is no opposition to the grant of the patent, or such opposition is unsuccessful, the Commissioner must grant a standard patent for the invention by sealing a standard patent in the approved form. A standard patent is to be granted within three to six months of publication of notice of acceptance of the patent request and complete specification in the Official Journal in the absence of opposition or court proceedings: Patents Regulations 1991 (Cth), reg 6.2. The term of a standard patent is 20 years from the date of the filing of the complete specification: Patents Act 1990 (Cth), ss 65, 67. The Patents Act 1990 contains provisions enabling a five-year extension for a standard patent of a pharmaceutical substance per se for human use: ss 70 – 79; Alphapharm Pty Ltd v H Lundbeck A/S (2014) 254 CLR 247. An extension may be opposed on the ground that a requirement for the extension was not satisfied (s 75(1)); an appeal lies to the Federal Court by an applicant and any opponent against a decision of the Commissioner (s 75(4)): Spirit Pharmaceuticals Pty Ltd v Mundipharma Pty Ltd (2013) 216 FCR 344. 40 40

C Lawson, “How are Pharmaceutical Patent Term Extensions Justified? Australia’s Evolving Scheme” (2013) 21 Journal of Law and Medicine 379.

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Innovation patent [8.2050] The discussion so far has centred on the application and grant of a standard patent. However, as previously mentioned, an application can be made for either a standard patent or for an innovation patent. The innovation patent was introduced on 24 May 2001 following the enactment of the Patents Amendment (Innovation Patents) Act 2000 (Cth). The innovation patent is intended to provide local industry, particularly small to medium size businesses and individuals, with a relatively cheap patent right that is quick and easy to obtain for minor or lower-level inventions. 41

Principal differences between an innovation patent and a standard patent 1. No substantive examination prior to grant [8.2060] Basically, an application (that is, a patent request and complete specification) for an innovation patent will be accepted and an innovation patent granted provided that the formalities of the application have been complied with: Patents Act 1990 (Cth), s 52. That is, there is no substantive examination of the application before the innovation patent is granted.

2. Certification necessary to bring an action for infringement [8.2070] For an innovation patent owner to be able to enforce their rights under the innovation patent, certification of the patent is necessary: Patents Act 1990 (Cth), s 120(1A). This will require examination of the innovation patent. That is, the patentee may request examination if they intend to enforce their rights against a potential infringer. Examination of the innovation patent will also occur where requested by the Commissioner of Patents or a third party: s 101A. In examining an innovation patent the Commissioner is to report on whether, inter alia, the specification complies with the general provisions as to specifications in s 40(2)-(4) and the requirements of an innovation patent (see [8.2080]): s 101B. If the Commissioner decides in writing that he or she is satisfied on the balance of probabilities that the patent complies with these requirements, the Commissioner must: (a)

notify the patentee that the patent has been examined and that a certificate of examination is to be issued;

(b)

publish a notice of the examination in the Official Journal;

(c)

issue a certificate of examination to the patentee; and

41

For discussion of the recommendations of the Advisory Council on Intellectual Property (ACIP) in its Review of the Innovation Patent System – Final Report (May, 2014), see M Davison, “The innovation patent system: Lessons for Australia in the IP reform process” (2015) 26 Australian Intellectual Property Journal 64. [8.2070] 435

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(d)

register the issue of the certificate: s 101E.

If these requirements are found on examination not to have been complied with the Commissioner must revoke the innovation patent: s 101F. Provision is made for the re-examination of an innovation patent (s 101G) and for its revocation in the event of an adverse report where the Commissioner is satisfied, on the balance of probabilities, that there is a ground of revocation: s 101J. Any person can oppose, in accordance with the regulations, an innovation patent that has been certified and seek its revocation on the grounds that the patentee is not entitled to the patent or only entitled to it in conjunction with some other person; that the complete specification does not comply with the general provisions as to specifications in s 40(2) – (3); or does not comply with the requirements of an innovation patent (see [8.2080]): s 101M.

3. Requirements of an innovation patent [8.2080] The basic requirements for an invention to be patentable as an innovation patent are essentially the same as those in respect of standard patents, including that the invention is a manner of manufacture, novel, useful and not secretly used before the priority date of the claim: Patents Act 1990 (Cth), s 18(1A)(a), (b) and (c). However, there is one important difference. For a claim of a standard patent to be valid it must involve an inventive step (s 18(1)(b)(ii), see [8.1900]). The corresponding requirement in the case of an innovation patent is that the claim must involve an innovative step: s 18(1A)(b)(ii). An innovative step requires a substantial contribution to the working of the invention: s 7(4). This is a lower inventive threshold than that of an inventive step required for a standard patent. The prior art base against which an innovative step is judged is essentially the same as for a standard patent (see [8.1880]). The presence or absence of a substantial contribution when the invention as claimed in each claim is compared with a prior disclosure involves a finding of fact: Dura-Post (Australia) Pty Ltd v Delnorth Pty Ltd (2009) 177 FCR 239. There are additional restrictions in respect of an innovation patent. Thus, an innovation patent cannot be obtained for plants and animals and the biological processes for the generation of plants and animals: s 18(3). This restriction does not apply to microbiological processes or the products of such processes: s 18(4). An application for an innovation patent must have one and no more than five claims: s 40(2)(c). In contrast, there is no limit to the number of claims that may be made in a standard patent.

4. Term of an innovation patent [8.2090] The maximum term of an innovation patent is eight years (compared with the usual 20 years for a standard patent): Patents Act 1990 (Cth), s 68. 436 [8.2080]

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Exclusive rights given by a patent [8.2100] A patent gives the patentee the exclusive right, during the term of the patent, to exploit the invention: Patents Act 1990 (Cth), s 13(1). The term “exploit” is defined in the Dictionary in Sch 1 of the Act as including: (a)

where the invention is a product – make, hire, sell or otherwise dispose of the product, offer to make, sell, hire or otherwise dispose of it, use or import it, or keep it for the purpose of doing any of those things; or

(b)

where the invention is a method or process – use the method or process or do any act mentioned in paragraph (a) in respect of a product resulting from such use.

Furthermore, the Patents Act 1990 has extended the grounds of infringement to include, in certain circumstances, the supply of a product, the use of which would infringe the patent: s 117; Northern Territory of Australia v Collins (2008) 235 CLR 619; cf Apotex Pty Ltd v Sanofi-Aventis Australia Pty Ltd (2013) 88 ALJR 261. The exclusive rights of a patentee are personal property and are capable of assignment and of devolution by law: s 13(2). As personal property, patent rights can be dealt with in the same way as any other chose in action, that is, they can be sold, leased, mortgaged or bequeathed in a will. An assignment of a patent must be in writing signed by or on behalf of the assignor and assignee, and a patent may be assigned for a place in or part of Australia: s 14. An inventor may benefit from their patented invention in any of the following ways, namely: (a)

exploit the rights under the patent personally;

(b)

sell or assign the patent or the rights to the patent outright; or

(c)

grant licences either exclusively to one person, or non-exclusively to several, in consideration of the payment of royalties.

Provision is made for the court to make an order requiring the patentee to grant an applicant a compulsory licence to work the patented invention, where the court is satisfied that the reasonable requirements of the public have not been satisfied and the patentee has given no satisfactory reason for failing to exploit the patent: ss 133 – 136.

Infringement of a patent [8.2110] A patent will be infringed where a person does something in relation to the invention which falls within the scope of the patentee’s exclusive rights (as outlined in the previous section) without the patentee’s consent. An alleged infringement must be assessed against a claim or claims for the patented invention. To establish an infringement of a patent, it must be shown that each of the essential integers, that is, features or elements, of the patent claim in issue has been taken by the alleged infringer in, for example, making their product [8.2110] 437

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or used in their process. Conversely, there will be no infringement if one or more of the essential elements in the claim is omitted or substituted by something different, that is, by something which does not fall within the description used by the claim: Populin v HB Nominees Pty Ltd (1982) 41 ALR 471; MJA Scientifics International Pty Ltd v SC Johnson & Son Pty Ltd (1998) 43 IPR 287. An essential element in an infringement action is the construction of the relevant claim or claims in the specification. The modern trend is to adopt what is referred to as a purposive construction, that is, regard is to be given to the purpose of the particular words used in a claim, rather than merely applying a purely literal construction: Catnic Components Ltd v Hill & Smith Ltd [1982] RPC 183 (HL); Nesbit Evans Group Australia Pty Ltd v Impro Ltd (1997) 39 IPR 56. In Kimberly-Clark Australia Pty Ltd v Multigate Medical Products Pty Ltd (2011) 92 IPR 21, the Full Federal Court held that the claims of the appellant’s patent specification for a “sterilization wrap” (used for sterilising surgical instruments) comprised of two fabric sheets joined together was not infringed by the respondent’s sterilisation wrap consisting of a single sheet folded over to give two layers.

Exemptions from infringement [8.2115] The Patents Act 1990 (Cth) was amended by the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 (Cth) to provide a new exemption from infringement where a patent is used for experimental purposes. A person may undertake an act without infringing a patent if it was for experimental purposes relating to the subject matter of the invention: s 119C(1). “Experimental purposes” include, but are not limited to: (a)

determining the properties of the invention;

(b)

determining the scope of a claim relating to the invention;

(c)

improving or modifying the invention;

(d)

determining the validity of the patent or of a claim relating to the invention; and

(e)

determining whether the patent for the invention would be, or has been, infringed by the doing of an act: s 119C(2).

The provision applies to acts done on or after 15 April 2012 in relation to patents granted before or after that date. A further exemption has been introduced with respect to acts undertaken for regulatory approval. A person may do an act without infringing a patent if it was solely for: (a)

purposes connected with obtaining an approval required by law to exploit a product, method or process; or

438 [8.2115]

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purposes connected with obtaining a similar approval under a law of another country: s 119B.

The provision does not apply in relation to a pharmaceutical patent which already had, and will continue to have, a similar exemption under s 119A.

Remedies for infringement [8.2120] Proceedings for infringement may be brought either by the patentee or an exclusive licensee, although where proceedings are brought by an exclusive licensee, the patentee must be joined as a party to the proceedings either as a co-plaintiff or as a defendant: Patents Act 1990 (Cth), s 120. The relief which a court may grant for infringement of a patent includes an injunction and, at the option of the plaintiff, either damages or an account of profits: s 122(1). 42 A court may refuse to award damages, or to make an order for an account of profits, if the defendant satisfies the court that at the date of the infringement the defendant was not aware, and had no reason to believe, that a patent for the invention existed. However, if patented products, marked so as to indicate that they are patented in Australia, were sold or used to a substantial extent before the date of the infringement, the defendant is to be taken to have been aware of the existence of the patent unless the contrary is established: s 123. Broadly, damages or an account of profits for infringement of a patent can be awarded back to the time when the patent became open to public inspection but proceedings for infringement cannot be instituted until the patent is granted: s 57. The High Court has stated that the purpose of the remedy of an account of profits is to prevent the unjust enrichment of the defendant: Dart Industries Inc v Decor Corp Pty Ltd (1993) 179 CLR 101. The court held in the latter case that a proportion of general overhead costs is allowable as a deduction in determining the profits made by the defendant from their infringement of the plaintiff’s patent. An interlocutory injunction may be granted in a case of a threatened infringement to restrain the importation and/or sale of goods alleged to infringe the plaintiff’s patent before the trial of the action. When determining whether to grant an interlocutory injunction, the court considers whether there is a prima facie case of infringement and the balance of convenience, that is, whether the inconvenience or injury that the plaintiff would be likely to suffer if an injunction was refused, outweighs or is outweighed by the injury which the defendant would suffer if an injunction was granted: Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618.

42

See G Adkins, “Decisions, Decisions: Damages or an Account of Profits for Patent Infringement?” (2011) 22 Australian Intellectual Property Journal 10. [8.2120] 439

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Case study [8.2125] Apple succeeded at first instance in obtaining an interlocutory injunction restraining Samsung from launching its tablet computer, the Galaxy Tab 10.1, into the Australian market just prior to Christmas 2011: Apple contended that the Samsung tablet computer infringed its patents in the Apple iPad computer. The Full Federal Court discharged (that is, set aside) the interlocutory injunction on appeal by Samsung: Samsung Electronics Co Ltd v Apple Inc (2011) 217 FCR 238.

Revocation of a patent [8.2130] It is important to appreciate that even where a patent is granted, this does not make the patent immune from further challenge. In other words, the grant of a patent is no guarantee of its validity. This is made clear by the Patents Act 1990 (Cth) which provides that nothing done under the Act guarantees that a patent is valid: s 20(1). Thus, a patent, once granted, may be subsequently revoked on certain specified grounds. A person may apply to the court for the revocation of a patent, either wholly or so far as it relates to a particular claim or claims, on one or more of the following grounds: (a)

that the patentee is not entitled to the patent;

(b)

that the invention is not a patentable invention (that is, under s 18, see [8.1800]);

(c)

that the patentee has contravened a condition in the patent;

(d)

that the patent was misrepresentation;

(e)

that an amendment of the patent request or the complete specification was made or obtained by fraud, false suggestion or misrepresentation;

(f)

that the specification does not comply with s 40(2) or (3) (that is, the requirements as to specifications, see [8.1970]-[8.1980]): s 138.

obtained

by

fraud,

false

suggestion

or

Furthermore, a defendant who is sued for infringement of the patent may counterclaim in the proceedings for revocation of the patent on one or more of the above grounds: s 121.

Register of Patents [8.2140] The Patents Act 1990 (Cth) provides for a Register of Patents in which are recorded particulars of patents in force; particulars of an entitlement as mortgagee, licensee or otherwise to an interest in a patent; and particulars of a transfer of an entitlement to a patent or licence, or to a share in a patent or licence: ss 186 – 187; Patent Regulations 1991 (Cth), reg 19.1. On the other hand, notice of any kind of trust relating to a patent or licence is not receivable by the 440 [8.2125]

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Commissioner and must not be registered: Patents Act 1990 (Cth), s 188. The Register can be inspected by any person during office hours at the Patent Office: s 190.

Employee inventions [8.2150] The Patents Act 1990 (Cth) does not explicitly deal with an employer’s rights to inventions made by employees. The Act simply lists in s 15(1) those to whom a patent may be granted which includes, under s 15(1)(b), those who would, on the grant of a patent, be entitled to an assignment of the patent. This would include, in an appropriate case, an employer. The question of the ownership of employee inventions will, in essence, turn on the contractual relationship between an employer and employee. In the absence of an express contractual provision dealing with the subject of ownership of inventions, the question will be determined by the terms implied by law in a contract of employment. The general principle is that where an employee in the course of their employment makes an invention which it was part of their duty to make, the law implies into the contract of employment a term that the invention is the property of the employer: Sterling Engineering Co Ltd v Patchett [1955] AC 534; Triplex Safety Glass Co Ltd v Scorah (1938) 55 RPC 21. On the other hand, where the invention falls outside the scope of the employee’s normal duties, the invention will belong to the employee. For example, the Federal Court held that an invention had not been produced by an employee in the course of his employment but during his own time and therefore the employee was entitled to the benefit of the invention as against his former employer: Spencer Industries Pty Ltd v Collins (2003) 58 IPR 425. Usually, the rights of an employer to inventions made by their employee would be specifically dealt with in the contract of employment. Most large employers have a standard clause to be included in the service agreement of any employee who is likely to have an opportunity to make inventions connected with their work. Furthermore, professional employees owe their employers fiduciary obligations not to profit from their position at the expense of their employer and to avoid conflicts of interest and duty: Victoria University of Technology v Wilson (2004) 60 IPR 392 at [149]. In the latter case it was held that two university academics had breached this duty in respect of an invention and associated software they had devised and for which they sought patent protection: they were ordered to account to the university for the benefits they had derived from their inventions. The general position of academics in universities who devise inventions in the course of their employment in the absence of specific contractual provision was considered by the Full Court of the Federal Court in University of Western Australia v Gray (2009) 179 FCR 346:

[8.2150] 441

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Case study [8.2160] Dr Gray was appointed professor of surgery by the University of Western Australia (UWA). He was required to teach and to conduct and stimulate research. Dr Gray discovered an innovative way of treating liver cancer by developing a range of microspheres which could be injected into the liver's blood supply and carried different anti-cancer agents to tumour sites. He was also a director and shareholder of a publicly listed company which was floated to commercialise and market the microspheres. UWA commenced proceedings against Dr Gray and the company claiming an interest in certain technologies UWA claimed were developed by Dr Gray while he was employed by the university. UWA alleged that Dr Gray had breached his contract of employment by failing to comply with disclosure and associated obligations imposed by its Patents Regulations; however, it was found that these had not been effectively promulgated. UWA further argued that it was an implied term of Dr Gray’s contract of employment that intellectual property developed in the course of his employment belonged to the university. However, this contention was rejected at first instance in the Federal Court by French J who said: “Absent express agreement to the contrary, rights in relation to inventions made by academic staff in the course of research and whether or not they are using university resources, will ordinarily belong to the academic staff as the inventors under the [Patents Act 1990 (Cth)]. The position is different if staff have a contractual duty to try to produce inventions. But a duty to research does not carry with it a duty to invent” (University of Western Australia v Gray (No 20) (2008) 246 ALR 603 at [12]). French J considered that the “only secure way” for UWA to acquire property rights from its academic staff in respect of intellectual property developed by them in the course of research was by express provision in their contracts of employment: at [12], [14]. UWA appealed to the Full Federal Court. However, the latter unanimously upheld the decision of French J and dismissed UWA’s appeal. In particular, the Full Federal Court agreed with the analysis of French J in rejecting UWA’s contention that there was an implied term in Dr Gray’s contract of employment with the university that inventions developed in the course of his research belonged to the university: University of Western Australia v Gray (2009) 179 FCR 346. The High Court refused special leave to appeal against the decision of the Full Federal Court.

Foreign patents [8.2170] A patent granted in one country only receives protection in that country. To extend such protection to other countries separate applications must be made in the countries concerned. Practically all the major countries of the world are parties to the International Convention for the Protection of Industrial Property (the Paris Convention) dating 442 [8.2160]

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from 1883, which provides, inter alia, for certain priorities to be given to patent applications in member countries. For example, a foreign applicant for an Australian patent is enabled to claim priority for the application based on the date of their application made in another country that is a party to the Convention, provided the Australian application is made within 12 months of the application in the other Convention country. The Patent Co-operation Treaty 1970 to which Australia became a party in 1979 is aimed at simplifying the procedures for obtaining patents in other countries but the scope of that treaty and of the European Patent Conventions lie outside the scope of the present work.

TRADE MARKS Nature of a trade mark [8.2180] A trade mark is a distinctive symbol which when applied to the goods or services of a particular trader distinguishes the trader’s goods or services from those of other persons. The function or essential characteristic of a trade mark is to indicate the commercial or trade origin of the goods or services to which it is applied: EJ Gallo Winery v Lion Nathan Australia Pty Ltd (2010) 241 CLR 144 at [42]-[43]. The Trade Marks Act 1995 (Cth) provides for the registration of trade marks and remedies for their infringement by those who use the same or similar trade mark.

Definition of a trade mark [8.2190] The Trade Marks Act 1995 (Cth) defines a trade mark as follows: A “trade mark” is a sign used, or intended to be used, to distinguish goods or services dealt with or provided in the course of trade by a person from goods or services so dealt with or provided by any other person: s 17.

It will be observed that central to that definition is the concept of a trade mark as a sign. A sign is in turn defined as including the following (or any combination): Any letter, word, name, signature, numeral, device, brand, heading, label, ticket, aspect of packaging, shape, colour, sound or scent: s 6.

The inclusion of any aspect of packaging, shape, colour, sound or scent significantly broadens the range of features or signs which are registrable under the present Trade Marks Act 1995 compared with the position under the former Trade Marks Act 1955 (Cth). For example, it was held by the House of Lords in Coca-Cola Trade Marks [1986] 1 WLR 695 that the well-known shape of the Coke bottle could not be registered as a trade mark; such would be registrable under the present legislation. Furthermore, sounds and smells are now registrable as trade marks. [8.2190] 443

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Rights given by registration of a trade mark [8.2200] The registered owner of a trade mark has the exclusive rights to: (a)

use the trade mark;

(b)

authorise other persons to use the trade mark in relation to the goods and/or services in respect of which the trade mark is registered; and

(c)

obtain relief under the Trade Marks Act 1995 (Cth) if the trade mark has been infringed: s 20.

Infringement of a registered trade mark is discussed at [8.2380]. The Trade Marks Act 1995 provides that a registered trade mark is personal property: s 21.

Application for registration of a trade mark [8.2210] A trade mark may be registered in respect of goods or services, or both goods and services: Trade Marks Act 1995 (Cth), s 19. A person may apply for the registration of a trade mark in respect of goods and/or services if: (a)

the person claims to be the owner of the trade mark; and

(b)

one of the following applies: (i)

the person is using or intends to use the trade mark;

(ii)

the person has authorised or intends to authorise another person to use the trade mark;

(iii)

the person intends to assign the trade mark to a body corporate that is about to be constituted: s 27(1).

The application must be in accordance with the Regulations and be filed at the Trade Marks Office in Canberra or at one of the sub-offices in the State capital cities. Trade marks are divided into 34 classes for goods and eight classes for services: Trade Marks Regulations 1995 (Cth), Sch 1. An application for registration of the trade mark may be made in respect of goods and services of one or more of these classes: Trade Marks Act 1995 (Cth), s 27(5). Registration of a trade mark may be in respect of goods or services of more than one class: s 19(2). The application will be examined to determine whether it is in accordance with the Act and whether there are grounds for rejecting it: s 31. Depending on the examination, the Registrar of Trade Marks will either accept or reject the application but may not reject an application without giving the applicant the opportunity of being heard: s 33. The Registrar must notify the applicant in writing of the decision to accept or reject the application and advertise the decision in the Official Journal: s 34. The applicant may appeal to the Federal Court against a decision of the Registrar to reject the application or to accept it subject to conditions or limitations: s 35. 444 [8.2200]

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Grounds for rejecting an application for registration [8.2220] The Trade Marks Act 1995 (Cth) contains a number of grounds on which the Registrar may reject an application for the registration of a trade mark.

Trade mark cannot be represented graphically [8.2230] An application for the registration of a trade mark must be rejected if the trade mark cannot be represented graphically: Trade Marks Act 1995 (Cth), s 40.

Trade mark does not distinguish the applicant's goods or services [8.2240] An application for the registration of a trade mark must be rejected if the trade mark is not capable of distinguishing the applicant’s goods or services in respect of which the trade mark is sought to be registered from the goods or services of other persons: Trade Marks Act 1995 (Cth), s 41(1). 43 A trade mark is taken not to be capable of distinguishing the designated goods or services from those of other persons only if either s 41(3) or (4) (discussed below) applies to the trade mark: s 41(2). In deciding whether or not a trade mark is capable of distinguishing the designated goods or services from those of other persons, the Registrar is first to take into account the extent to which the trade mark is inherently adapted to distinguish the applicant’s goods or services from those of others: s 41(3). Trade marks that are not inherently adapted to distinguish goods or services are mostly trade marks that consist of a sign that is ordinarily used to indicate the kind, quality, quantity, intended purpose, value, geographical origin, or some other characteristic, of goods or services. If the Registrar is unable to decide whether the trade mark is capable of distinguishing the applicant’s goods or services, then the following provisions apply. If the Registrar finds that the trade mark is to some extent inherently adapted to distinguish the applicant’s goods or services, then the Registrar is to consider whether that fact combined with the use, or intended use, of the trade mark by the applicant, together with any other circumstances, are sufficient to conclude that the trade mark does or will distinguish the applicant’s goods or services from those of others: s 41(4). If the Registrar finds that the trade mark is not inherently adapted to distinguish the applicant’s goods or services from those of others but the applicant establishes that, because of the extent to which the applicant has used the trade mark before filing the application, it does distinguish the applicant’s goods or services, then the trade mark is taken to be capable of 43

It is important to note that s 41 above is a reworded section replacing the former s 41 of the Trade Marks Act 1995 (Cth) under the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 (Cth), Sch 6, Item 113. The new s 41 came into operation on 15 April 2013. [8.2240] 445

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distinguishing the designated goods or services from those of other persons and is therefore registrable: Trade Marks Act 1995 (Cth), s 41(3). Case study [8.2245] In Cantarella Bros Pty Ltd v Modena Trading Pty Ltd (2014) 254 CLR 337 the appellant, Cantarella, owned registered trade marks for “ORO” and “CINQUE STELLE” (the Italian words for “gold” and “five stars”) in relation to coffee and related products. Cantarella alleged that the respondent, Modena, had infringed its trade marks by importing into Australia Italian coffee products in packaging containing the words. Modena cross-claimed, seeking cancellation of Cantarella’s registered trade marks on the basis that they were not capable of distinguishing Cantarella’s goods from those of other persons. 44 The High Court held by a majority (French CJ, Hayne, Crennan and Kiefel JJ, Gageler J dissenting), reversing the decision of the Full Federal Court, that Cantarella’s registered trade marks were “inherently adapted” (that is, distinctive) to distinguish the goods for which they were registered from the goods of others. In a joint judgment, the majority of the Court said that the inherent adaptability of a trade mark consisting of a word (including a foreign word) is to be tested by checking what that word ordinarily means or signifies to anyone ordinarily purchasing, consuming or trading in the relevant goods: a word having “direct reference” to the character or quality of the goods is prima facie not registrable. Once the ordinary meaning of a word is established, an inquiry can then be made into whether other traders might legitimately want to use the word in respect of the same or similar goods: if so, the word or words would not be registrable as trade marks. By contrast, on the particular facts, the words (at [73]): “‘ORO’ and ‘CINQUE STELLE’ were not shown to convey a meaning or idea sufficiently tangible to anyone in Australia concerned with coffee goods as to be words having a direct reference to the character or quality of the goods.” Further, the majority of the Court were of the view that the evidence led by Modena failed to demonstrate that honest traders might legitimately wish to use the words to directly describe, or indicate, the character or quality of their goods. Accordingly, Modena had not established that the words “ORO” and “CINQUE STELLE” should not be registered as trade marks.

Trade mark likely to deceive or cause confusion [8.2250] An application for the registration of a trade mark in respect of particular goods or services must be rejected if the use of the trade mark in relation to those goods or services would be likely to deceive or cause confusion: Trade Marks Act 1995 (Cth), s 43.

44

That is, within the meaning of the former s 41 of the Trade Marks Act 1995 (Cth) (see the first footnote in [8.2240]).

446 [8.2245]

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Substantially identical trade marks [8.2260] An application for the registration of a trade mark in respect of goods must be rejected if the applicant’s trade mark is substantially identical with or deceptively similar to a trade mark registered by another person in respect of similar goods or closely related services, or to a trade mark being sought in respect of similar goods or services by another person, unless the priority date for the registration of the applicant’s trade mark is earlier. There is a similar provision in respect of an application for the registration of a trade mark relating to services: Trade Marks Act 1995 (Cth), s 44(1), (2). However, the above discussion is subject to the honest concurrent use provisions of the Act. Thus, sometimes traders may adopt the same or a similar mark for their goods and services in good faith and quite independently of each other. To deal with this situation, the Trade Marks Act 1995 provides that if the Registrar is satisfied that there has been an honest concurrent use of the two trade marks, or that because of other circumstances it is proper to do so, the Registrar may accept the application for the registration of the applicant’s trade mark subject to any conditions or limitations that the Registrar thinks fit to impose. If the applicant’s trade mark has been used only in a particular area, the limitations may include that the use of the trade mark is to be restricted to that particular area: s 44(3). Furthermore, if the Registrar is satisfied that the applicant, or her or his predecessor in title, have used the trade mark in respect of similar goods or closely related services for a period before the priority date for the registration of the other trade mark up to the priority date for the registration of the applicant’s trade mark, the Registrar is not to reject the application because of the existence of the other trade mark: s 44(4).

Other grounds for rejection [8.2270] An application for the registration of a trade mark must be rejected if: (a)

the trade mark contains or consists of scandalous matter; or

(b)

its use would be contrary to law: Trade Marks Act 1995 (Cth), s 42.

An application must also be rejected if the trade mark contains a sign that, under the regulations, is not to be used as a trade mark: s 39. This includes, for example, the words Patent, Patented, By Royal Letters Patent; or a representation of the Arms, flag or seal, of the Commonwealth, a State or Territory: Trade Marks Regulations 1995 (Cth), reg 4.15.

Opposition to registration [8.2280] Where the Registrar has accepted an application for the registration of a trade mark, a person may oppose the registration by filing a notice of opposition within three months from the day on which the acceptance of the application is advertised in the Official Journal: Trade Marks Act 1995 (Cth), s 52; Trade Mark Regulations 1995 (Cth), reg 5.1. [8.2280] 447

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After hearing both the applicant and the opponent, the Registrar must decide whether to refuse to register the trade mark, or register the trade mark (with or without conditions or limitations) in respect of the goods and/or services specified in the application: Trade Marks Act 1995 (Cth), ss 54, 55. The applicant or opponent may appeal to the Federal Court from a decision of the Registrar: s 56.

Grounds for opposing registration [8.2290] The registration of a trade mark may be opposed on any of the grounds on which an application for the registration of a trade mark may be rejected (see previous section), except the ground that the trade mark cannot be represented graphically: Trade Marks Act 1995 (Cth), s 58. Further grounds of opposition set down in the Trade Marks Act 1995 are as follows:

Applicant not the owner of the trade mark [8.2300] The registration of a trade mark may be opposed on the ground that the applicant is not the owner of the trade mark: Trade Marks Act 1995 (Cth), s 58.

Applicant not intending to use the mark [8.2310] A further ground of opposition is that the applicant does not intend: (a)

to use, or authorise the use of, the trade mark in Australia; or

(b)

to assign the trade mark to a body corporate for use in Australia: Trade Marks Act 1995 (Cth), s 59.

Trade mark similar to a trade mark that has acquired a reputation in Australia [8.2320] The registration of a trade mark in respect of particular goods and services may be opposed on the ground that: (a)

it is substantially identical with, or deceptively similar to, a trade mark that had already acquired a reputation in Australia; and

(b)

because of that reputation, the use of the applicant’s trade mark would be likely to deceive or cause confusion: Trade Marks Act 1995 (Cth), s 60.

Case study [8.2325] The Federal Court upheld the opposition of the registered owner of a number of registered trade marks comprising the word “BOTOX” to an application for registration of the trade mark “No-Tox” in relation to facial care products on the ground that the use of the “No-Tox” mark would be likely to deceive or cause confusion within the meaning of s 60: Allergan Inc v Di Giacomo (2011) 199 FCR 126.

448 [8.2290]

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Trade mark contains a false geographical indication [8.2330] The registration of a trade mark in respect of particular goods may be opposed on the ground that the trade mark contains or consists of a sign that is a geographical indication for goods originating in a country, or in a region or locality in a country, other than that in which the goods actually originated: Trade Marks Act 1995 (Cth), s 61.

Application defective [8.2340] A further ground of opposition to registration is that the Registrar accepted the application on the basis of evidence or representations that were false: Trade Marks Act 1995 (Cth), s 62.

Application made in bad faith [8.2345] The registration of a trade mark may be opposed on the ground that the application was made in bad faith: Trade Marks Act 1995 (Cth), s 62A. The issue to be decided is whether the applicant’s knowledge, in all the circumstances, was such that “persons adopting proper standards would regard the decision to register as in bad faith, or that reasonable and experienced persons in the field would view such conduct as falling short of acceptable commercial behaviour”: Fry Consulting Pty Ltd v Sports Warehouse Inc (No 2) (2012) 201 FCR 565 at [174] per Dodds-Sreeton J; cf DC Comics v Cheqout Pty Ltd (2013) 212 FCR 194.

Registration and term of registration [8.2350] When a trade mark has been registered, the Registrar must advertise the registration in the Official Journal, and give the registered owner of the trade mark a certificate of registration: Trade Marks Act 1995 (Cth), s 71. The registration of a trade mark expires after 10 years and may be renewed indefinitely for further periods of 10 years on payment of prescribed fees: ss 72(3), 77. The registration of a trade mark ceases if the trade mark is removed from the Register because of non-renewal or for non-use, or because the registration of the trade mark is cancelled: s 73.

Rectification of the register and cancellation [8.2360] On the application of an aggrieved person (that is, a person with a trading interest to protect) the court may order that the Register of Trade Marks be rectified by: (a)

entering in the Register particulars that were wrongly omitted from it; or

(b)

correcting any error in an entry: Trade Marks Act 1995 (Cth), s 85. [8.2360] 449

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More significantly, the court, on the application of an “aggrieved person”, may order that the Register be rectified by: (a)

cancelling the registration of a trade mark;

(b)

removing or amending an entry wrongly made or remaining on the Register; or

(c)

entering any condition or limitation affecting the registration of a trade mark that ought to be entered: Trade Marks Act 1995 (Cth), s 88(1).

The High Court has held that the expression “aggrieved person” is to be liberally construed and that it is sufficient that the applicant and the proprietor of the mark both trade in the class of goods in respect of which the challenged mark is registered: Health World Ltd v Sin-Shun Australia Pty Ltd (2010) 240 CLR 590. The grounds on which an application for rectification may be made include: (a)

any of the grounds on which the registration of the trade mark could have been opposed (see [8.2290]-[8.2340]);

(b)

where an amendment of the application for registration was obtained as a result of fraud, false suggestion or misrepresentation;

(c)

where, because of the circumstances applying at the time when the application for rectification is filed, the use of the trade mark is likely to deceive or cause confusion for a reason other than one for which the application for registration could have been rejected (see [8.2220][8.2270]) or opposed (see [8.2290]-[8.2340]); and

(d)

where the entry on the Register was made, or had previously been amended, as a result of fraud, false suggestion or misrepresentation: Trade Marks Act 1995 (Cth), s 88(2).

Case study [8.2362] The respondent, a United States corporation, had manufactured and sold “Winnebago” recreational vehicles in the United States since 1959 and later exported them but not to Australia. From 1978, the appellant began manufacturing and selling recreational vehicles in Australia using the Winnebago name without the respondent’s knowledge or permission: subsequently, the appellant registered the name as a trade mark. The respondent first became aware of the appellant’s activities in 1985 but delayed legal proceedings until 2010 when it sought, inter alia, cancellation of the appellant’s trade mark pursuant to s 88(1) of the Trade Marks Act 1995 (Cth) on the ground that the use of the mark was likely to deceive or cause confusion under Trade Marks Act 1995 (Cth), s 88(2)(c) (see above). The Full Federal Court upheld the decision of the primary judge that the Trade Marks Register should be rectified by the cancellation and removal of the appellant’s trade mark. The respondent had also sought injunctive relief for the appellant’s use of their name. The Court said that the respondent had sufficient 450 [8.2362]

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reputation in Australia in 1978 to sustain its action as there were a substantial number of people in Australia who were aware of the respondent’s products and therefore were potential customers. However, in view of the respondent’s extraordinary delay in bringing proceedings and that the appellant had used the Winnebago name concurrently for over 30 years, during which time it had built a significant business and developed an Australian reputation, injunctive relief should be limited to providing the minimum necessary for consumer protection. Accordingly, the appellant was not required to cease using the name provided that a clear distinction between the parties was made on the vehicles themselves and on documents dealing with them: Knott Investments Pty Ltd v Winnebago Industries Inc (2013) 211 FCR 449.

Case study [8.2365] TiVo Inc registered the trade mark “TiVo” in respect of audio-visual products in 2000. Vivo International Corpn Pty Ltd obtained registration of its trade mark “Vivo” in 2009 for similar audio-visual products. The Full Federal Court held that the “Vivo” trade mark was deceptively similar to the “TiVo” mark because of the “strong phonetic similarity” between the two marks. An order was made for the cancellation of the “Vivo” trade mark and an injunction granted restraining further use of the mark: Vivo International Corpn Pty Ltd v TiVo Inc (2012) 294 ALR 661.

[8.2367] If the ground for the application for rectification is that the trade mark is liable to deceive or confuse, the court may decide not to grant the application if the registered owner of the trade mark satisfies the court that this did not arise through any act or fault on her or his part: s 89.

Removal of a trade mark for non-use [8.2370] A trade mark is defined as a sign used or intended to be used to distinguish a person’s goods or services in the course of trade from those of any other person: Trade Marks Act 1995 (Cth), s 17. In other words, a basic requirement of a registered trade mark is that the owner is using it, or at least has a definite intention to use it. Accordingly, the Trade Marks Act 1995 contains provision for the removal of a registered trade mark for non-use: s 92. The latter section provides that a person aggrieved may apply to the Registrar for a trade mark to be removed from the Register for non-use. That is, a non-use application may be made to the Registrar for a trade mark to be removed from the Register on the grounds that: (a)

the applicant had no intention in good faith of using, authorising the use of, or assigning the trade mark to a body corporate for use in Australia, at the time the application for registration of the trade mark

[8.2370] 451

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was filed, and the registered owner has not used the trade mark, or not used it in good faith, in Australia up to a month before the non-use application was filed (s 92(4)(a)); or the trade mark has remained registered for a continuous period of three years up to a month before the non-use application was filed, and the registered owner has not used it, or not used it in good faith, in Australia at any time during that period. A non-use application on this ground may not be made before the expiry of five years from the filing of the application for the registration of the trade mark: ss 92(4)(b), 93(2); EJ Gallo Winery v Lion Nathan Australia Pty Ltd (2010) 241 CLR 144.

(b)

Any person may oppose an application to the Registrar for removal of a trade mark for non-use: s 96. If the Registrar is of the opinion that the application for the removal of the trade mark should be determined by the court, the Registrar can refer the matter to the court: s 94.

Infringement of trade marks and remedies for infringement [8.2380] A registered trade mark is infringed by a person who uses as a trade mark a sign that is substantially identical with, or deceptively similar to, the trade mark in relation to goods or services in respect of which the trade mark is registered: Trade Marks Act 1995 (Cth), s 120(1). To be liable for infringement, the defendant must have used the trade mark as a trade mark. Accordingly, merely to produce and deal in goods having the shape (being a functional shape) of something depicted by a trade mark is not to engage in a use of the mark: Case study [8.2390] In Koninklijke Philips Electronics NV v Remington Products Australia Pty Ltd (2000) 100 FCR 90, the Full Federal Court held that the manufacture and sale of a rotary shaver with three shaving heads by Remington did not infringe the registered trade mark of Philips depicting three shaving heads forming an equilateral triangle.

[8.2400] A person also infringes a registered trade mark if the person uses as a trade mark a sign that is substantially identical with, or deceptively similar to, the trade mark in relation to: (a)

goods of the same description as that of goods (registered goods) in respect of which the trade mark is registered; or

(b)

services that are closely related to registered goods; or

(c)

services of the same description as that of services (registered services) in respect of which the trade mark is registered; or

(d)

goods that are closely related to registered services.

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However, the person is not taken to have infringed the trade mark if the person establishes that using the sign as the person did is not likely to deceive or cause confusion: Trade Marks Act 1995 (Cth), s 120(2). Furthermore, a person infringes a registered trade mark if: (a)

the trade mark is well known in Australia; and

(b)

the person uses as a trade mark a sign that is substantially identical with, or deceptively similar to, the trade mark in relation to: (i)

goods (unrelated goods) that are not of the same description as that of the goods in respect of which the trade mark is registered (registered goods) or are not closely related to services in respect of which the trade mark is registered (registered services); or

(ii)

services (unrelated services) that are not of the same description as that of the registered services or are not closely related to registered goods; and

(c)

because the trade mark is well known, the sign would be likely to be taken as indicating a connection between the unrelated goods or services and the registered owner of the trade mark; and

(d)

for that reason, the interests of the registered owner are likely to be adversely affected [emphasis added]: s 120(3).

In determining whether trade marks are substantially identical they are compared side by side, their similarities and differences assessed having regard to their essential features as identified by the court’s own judgment and by the evidence. If they differ only in non-essential respects, then they will be held to be substantially identical. As regards the issue of deceptive similarity, the Act provides that a trade mark is taken to be deceptively similar to another trade mark if it so nearly resembles that other trade mark that it is likely to deceive or cause confusion: s 10. Accordingly, it is a matter of comparing the impression that persons of ordinary intelligence would have of the plaintiff’s mark, as based on their recollection of it, and the impression created by use of the defendant’s mark: Shell Co of Australia Ltd v Esso Standard Oil (Aust) Ltd (1963) 109 CLR 407; Berlei Hestia Industries Ltd v Bali Co Inc (1973) 129 CLR 353. The Federal Court recently held that certain types of sports shoes (but not others) bearing four stripes marketed by the respondent were deceptively similar to the applicant’s registered trade marks of three stripes for sports shoes since: “[T]here is a real, tangible danger of confusion occurring, beyond a mere possibility, and a number of persons will be caused to wonder whether it might not be the case that the two products come from the same source”: Adidas AG v Pacific Brands Footwear Pty Ltd (No 3) (2013) 103 IPR 521. [8.2400] 453

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By contrast, the Federal Court held that the mark “DIGITAL POST AUSTRALIA” was not deceptively similar to the mark “AUSTRALIA POST”: Australian Postal Corporation v Digital Post Australia Pty Ltd (No 2) (2012) 96 IPR 532.

Statutory defences [8.2410] The Trade Marks Act 1995 (Cth) provides that, notwithstanding the factors constituting infringement set out at [8.2380] and [8.400], a person does not infringe a registered trade mark, inter alia, when the person: (a)

uses in good faith, her or his name, or the name of her or his place of business, or the name of her or his predecessor in business;

(b)

uses a sign in good faith to indicate the kind, quality, quantity, intended purpose, value, geographical origin, or some other characteristic of goods or services;

(c)

uses the trade mark in good faith to indicate the intended purpose of the goods (in particular as accessories or spare parts) or services;

(d)

uses the trade mark for the purposes of comparative advertising;

(e)

exercises a right to use a trade mark given to the person under the Act; or

(f)

the court is of the opinion that the person would obtain registration of the trade mark in her or his name if the person were to apply for it: s 122.

The Act also provides that a person who uses a registered trade mark in relation to goods that are similar to goods in respect of which the trade mark is registered does not infringe the trade mark if it has been applied to the goods by, or with the consent of, the registered owner of the trade mark; there is a similar provision in respect of the use of a trade mark in relation to services: s 123. 45 Case study [8.2420] A trade mark had been applied overseas to tyres by the Australian registered owner of the trade mark. The Full Federal Court held that s 123 of the Trade Marks Act 1995 (Cth) provided a defence to the importer (that is, parallel importer) of the tyres into Australia: Transport Tyre Sales Pty Ltd v Montana Tyres Rims and Tubes Pty Ltd (1999) 93 FCR 421.

[8.2425] However, the Full Federal Court has held that the defence in s 123 does not apply to an importer where the registered owner consents to another person applying the registered mark on condition that the goods must not be supplied outside a designated territory, for example, India. In such a case the 45

See generally, M Rothnie, “Trade marks and parallel imports” (2014) 22 Competition & Consumer Law Journal 39.

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registered owner would not usually be regarded as having consented to the application of the mark to goods which the licensee knows at the time he or she applies the mark are to be supplied by him or her outside the designated territory: Paul’s Retail Pty Ltd v Sports Leisure Pty Ltd (2012) 95 IPR 151. [8.2430] A person does not infringe a registered trade mark by using an unregistered trade mark that is substantially identical with, or deceptively similar to, the registered mark in relation to similar goods or services, if the person and her or his predecessor in title, have continuously used the unregistered trade mark in the course of trade from a time before the date of registration of the registered trade mark, or first use of the trade mark by the registered owner, or a predecessor in title: Trade Marks Act 1995 (Cth), s 124.

Remedies for infringement [8.2450] The remedies for infringement of a trade mark include an injunction and, at the option of the plaintiff, either damages or an account of profits: Trade Marks Act 1995 (Cth), s 126(1). Section 126 was amended by the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 (Cth) to give a court the discretion to award additional damages if the court considers it appropriate to do so having regard, inter alia, to: (a)

the flagrancy of the infringement;

(b)

the need to deter similar infringements of registered trade marks; and

(c)

any benefit shown to have accrued to the infringer because of the infringement: Trade Marks Act 1995 (Cth), s 126(2).

Case study [8.2423] The appellants claimed that the respondent company had infringed their Australian registered trade marks by parallel importing brands of cigars manufactured by the appellants overseas; removing the original packaging with the trade marks; repackaging the cigars to comply with Australia’s tobacco plain packaging laws; and re-applying the word marks, for example, HENRI WINTERMANS to the new packaging. The Full Federal Court held that s 123 provided a defence to the appellants’ infringement action against the respondent importer because at the time of the original packaging, the trade marks had been applied to, or in relation to the cigars by, or with the consent of, the registered owner of the trade marks: Scandanavian Tobacco Group Eersel BV v Trojan Trading Company Pty Ltd [2016] FCAFC 91.

Case study [8.2455] The respondent was found to have breached the applicant’s trade mark which was a food label indicating the food was “halal”, that is, slaughtered in accordance with Islamic rites. The respondent had provided a [8.2455] 455

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false certificate each time a kebab shop asked for one. Substantial additional damages were awarded to “operate as a sufficient deterrent to ensure that the conduct will not occur again”: Halal Certification Authority Pty Ltd v Scadilone Pty Ltd (2014) 107 IPR 23 at [111] per Perram J.

[8.2457] Damages or an account of profits are not to be awarded in respect of an infringement by the defendant if the latter has applied to the court for an order directing the Registrar to remove the trade mark from the Register for non-use (under s 92(4), see [8.2370]), and the court finds that there are grounds for so removing the trade mark because it had not been used in good faith by the registered owner: s 127.

Authorised users [8.2460] A person is an authorised user of a trade mark if the person uses the trade mark in relation to goods or services under the control of the owner of the trade mark. Where the owner of a trade mark exercises quality control over the goods and services provided by the user of the trade mark, or exercises financial control over the trading activities of the user, then such person is taken to use the trade mark in relation to the goods and services under the control of the owner of the trade mark: Trade Marks Act 1995 (Cth), s 8. The authorised user of a trade mark may do any of the following (subject to any agreement between the registered owner and the authorised user): (a)

use the trade mark in relation to the goods and/or services in respect of which the trade mark is registered;

(b)

bring an action for infringement of the trade mark if the registered owner refuses or neglects to do so within the prescribed period;

(c)

cause to be displayed on goods in respect of which the trade mark is registered a notice prohibiting certain acts, for example, altering, partially removing or obliterating the trade mark, or applying another trade mark to the goods;

(d)

give the Comptroller-General of Customs a notice (under s 132) objecting to the importation of goods that infringe the trade mark, or revoke such notice;

(e)

give permission to any person to alter, deface or remove the trade mark; and

(f)

give permission to any person to apply the trade mark in relation to goods, or in relation to goods or services in respect of which the trade mark is registered: s 26(1).

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If the authorised user brings an action for infringement of the trade mark, the registered owner must be made a defendant to the action. However, the registered owner is not liable for costs if he or she does not take part in the proceedings: s 26(2).

Collective, certification and defensive trade marks [8.2470] The Trade Marks Act 1995 (Cth) makes provision for the registration of collective, certification and defensive trade marks.

Collective trade marks [8.2480] A collective trade mark is a sign used, or intended to be used, in relation to goods or services dealt with or provided in the course of trade by members of an association to distinguish those goods or services from goods or services provided by persons who are not members of the association: Trade Marks Act 1995 (Cth), s 162. An application for registration of a collective trade mark must be made by the association to which the mark belongs: s 164. A collective trade mark may not be assigned: s 166. In an action by an association in whose name a collective trade mark is registered seeking relief for infringement of the collective trade mark, the association may take into account in claiming damages, any damage or loss of profits incurred by members of the association as a result of the infringement: s 167.

Certification trade marks [8.2490] A certification trade mark is a sign used to distinguish goods or services certified by the owner of the certification trade mark, in relation to quality, accuracy or some other characteristic, including (in the case of goods) origin, material or mode of manufacture, from other goods or services which are not so certified: Trade Marks Act 1995 (Cth), s 169. A person who has filed an application for the registration of a certification trade mark must also file a copy of the rules governing the use of the certification mark: s 173. Where the Registrar is satisfied that there are no grounds for rejecting the application, he or she must send a copy of the application to the Australian Competition and Consumer Commission for consideration as to whether the applicant is competent to certify the goods and/or services in respect of which the certification trade mark is to be registered, and that the rules governing the use of the certification mark would not be to the detriment of the public: ss 174, 175. A registered certification mark may be assigned only with the consent of the Commission: s 180. An example of certification trade marks are the trade marks owned by the Australian Standards Association.

[8.2490] 457

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Defensive trade marks [8.2500] The Trade Marks Act 1995 (Cth) provides further protection for well known registered trade marks by enabling their registration as defensive trade marks to prevent them from being used by others in relation to goods or services. Thus, if because of the extent to which a registered trade mark has been used in relation to all or any of the goods or services in respect of which it is registered, it is likely that its use in relation to other goods or services will be taken to indicate that there is a connection between those other goods or services and the registered owner of the trade mark, then on the application of the registered owner, the trade mark may be registered as a defensive trade mark in respect of any or all of those other goods or services. A trade mark may be registered as a defensive trade mark in respect of particular goods or services even if the registered owner does not use or intend to use the trade mark in relation to those goods or services: s 185. For example, the trade mark Ford is so well known in respect of motor vehicles that its use by some other person on motor vehicle batteries would be likely to indicate a connection between the batteries and the Ford Motor Company. Accordingly, such use could be prevented by registration of Ford for motor vehicle batteries as a defensive trade mark.

Assignment of trade marks [8.2510] A registered trade mark, or a trade mark whose registration is being sought, may be assigned. The assignment may be partial, that is, it may apply to some only of the goods and/or services in respect of which registration is sought or the trade mark is registered. The assignment may be with or without the goodwill of the business concerned in the relevant goods and/or services: Trade Marks Act 1995 (Cth), s 106. Where a registered trade mark is assigned, the person registered as the owner of the trade mark, or the person to whom the trade mark has been assigned, must apply to the Registrar for the assignment to be entered in the Register of Trade Marks: s 109.

Voluntary recording of claims to interests in trade marks [8.2520] The Trade Marks Act 1995 (Cth) makes provision for the recording of interests in registered trade marks in the Register of Trade Marks. Thus, if a person (other than the registered owner of the trade mark) claims to have an interest in a registered trade mark, that person and the registered owner of the trade mark may together apply to the Registrar to have particulars of the claim recorded in the Register: s 113. There is a similar provision where a person has applied for the registration of a trade mark: s 117. These provisions allow, for example, a bank to record a security interest (for example, a mortgage) in a trade mark. The voluntary recording scheme may 458 [8.2500]

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also be utilised by a licensee who wishes to put third parties on notice that the registered owner has licensed the use of the trade mark to the licensee.

Importation of goods infringing Australian trade marks [8.2530] The Trade Marks Act 1995 (Cth) contains detailed provisions allowing the Comptroller-General of Customs to seize and deal with goods that are imported into Australia if the importation infringes, or appears to infringe, a registered trade mark: ss 131 – 143.

Offences [8.2540] The Trade Marks Act 1995 (Cth) contains a number of offences in relation to trade marks. For example, it is an offence for a person: (a)

to intentionally or recklessly falsify (for example, alter, deface or obliterate) or unlawfully remove a registered trade mark that has been applied to goods or services (s 145);

(b)

to intentionally or recklessly falsely apply a registered trade mark to goods or services (s 146); or

(c)

to intentionally sell or import goods knowing that a falsified registered trade mark is applied to them, or has been unlawfully removed from them: s 148.

A person guilty of these offences is punishable on conviction by a fine not exceeding 500 penalty units ($85,000), or imprisonment for a period not exceeding two years, or by both a fine and imprisonment: s 149.

International trade mark registration [8.2550] Australia has acceded to the Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks (the Madrid Protocol), the instrument of accession coming into force on 11 July 2001. The effect of acceding to the Madrid Protocol is to make it easier and less expensive for Australian trade mark owners to seek protection for their trade marks overseas. Formerly, it was necessary to apply separately for trade marks in each of the countries where registration was sought in the language and currency of that country. In contrast, trade mark owners will now only need to file a single application in English through IP Australia’s Trade Marks Office to seek protection in any one or more of the countries which are parties to the Madrid Protocol.

[8.2550] 459

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PASSING OFF Nature of the action of passing off [8.2560] Passing off occurs where a person falsely represents their goods or services as those of the plaintiff, or that their business is associated with the plaintiff, so as to cause damage or likely damage to the plaintiff’s goodwill or reputation. The basic characteristics of an action for passing off were described by Lord Diplock in Erven Warnink v J Townend & Sons (Hull) Ltd [1979] AC 731 at 742 as follows: “(1) a misrepresentation (2) made by a trader in the course of trade, (3) to prospective customers of his or ultimate consumers of goods or services supplied by him, (4) which is calculated to injure the business or goodwill of another trader (in the sense that this is a reasonably foreseeable consequence) and (5) which causes actual damage to a business or goodwill of the trader by whom the action is brought or … will probably do so.”

The principal elements of a passing off action outlined in that passage and as subsequently developed by the courts are: (a)

the existence of some reputation or goodwill in the plaintiff’s name, mark, or the get-up (for example, the packaging) of her or his goods;

(b)

deceptive conduct on the part of the defendant by the use of the same or deceptively similar name, mark, or get-up; and

(c)

either actual damage or the threat of damage to the plaintiff’s business reputation or goodwill as a result of the defendant’s conduct (that is, the passing off).

The scope of the tort of passing off has been steadily expanded by a process of judicial development over the years and adapted to meet new circumstances involving the deceptive or confusing use of names, descriptive terms or other indicia to persuade purchasers or customers to believe that goods or services have an association, quality or indorsement which belongs to goods or services of, or is associated with, another person or business: Moorgate Tobacco Co Ltd v Philip Morris Ltd (No 2) (1984) 156 CLR 414 at 445-446. Examples of the action of passing off: Case study [8.2570] The applicants imported for sale in Australia a carbonated energy drink known as “Red Bull” which was widely advertised. The drink was sold in a drink can of distinctive appearance. The respondents imported for sale cans of an energy drink under the trade mark “LiveWire”. It was held that the applicants' claim for passing off had been made out since, notwithstanding the obvious difference in the trade marks of the two products, the packaging get-up of “LiveWire” was so deceptively similar to “Red Bull” as to have enabled the respondents to appropriate part of the applicants' goodwill in the

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marketplace for energy drinks: Red Bull Australia Pty Ltd v Sydneywide Distributors Pty Ltd (2001) 53 IPR 481.

Case study [8.2580] In contrast, the plaintiffs were the manufacturers of a tangy lemon drink called “Solo” which was sold in a yellow can with a medallion design. The defendants marketed a similar drink called “Pub Squash” which was also marketed in a yellow can with a medallion design. It was held that the claim in passing off failed, since it was found that consumers would not be deceived into inferring a connection between the respective drinks or their producers: Cadbury Schweppes Pty Ltd v Pub Squash Co Pty Ltd [1980] 2 NSWLR 851 (PC).

Case study [8.2590] The plaintiff manufactured and marketed frozen food products in the US under the brand name “Healthy Choice”. The defendant was a manufacturer of frozen foods in Australia. The defendant adopted the name “Healthy Choice” and the same form of packaging for its new line of frozen food products as that developed by the plaintiff in the US. The plaintiff’s action for, inter alia, passing off was dismissed by the Full Court of the Federal Court since the plaintiff failed to establish a reputation in Australia in respect of its products. The court stated that it is not a requirement for a plaintiff to carry on business in Australia or have a physical presence here. “It is sufficient if his goods have a reputation in this country among persons here … of a sufficient degree to establish that there is a likelihood of deception among consumers and potential consumers and of damage to his reputation.” The requisite reputation may be proved by a variety of means including, for example, advertisements in the various forms of media and the exposure of people in this country to the goods of the overseas owner. However, the evidence failed to show that the plaintiff enjoyed a reputation for its products in Australia: ConAgra Inc v McCain Foods (Aust) Pty Ltd (1992) 33 FCR 302.

CHARACTER MERCHANDISING [8.2600] The action of passing off has also been utilised in recent years in relation to the increasing practice of “character merchandising”, that is, the marketing of goods and services by taking advantage of an association with some real or fictitious person, character, group or film. “All manufacturers, traders and consumers are familiar with marketing practices involving ‘character merchandising’. Many purchasers are prepared to pay more for goods simply because they bear the name of, or some symbol or drawing associated with, a popular character (who may be real or fictitious) or a well

[8.2600] 461

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known institution or event.” 46 The representation of, for example, a popular fictional character on toys, T-shirts, posters and other forms of merchandise is common and the licensing of the use of such representation by others is often a valuable right for the creator or owner of the character. An action for passing off will lie in an appropriate case to protect the unauthorised use of such representation as the following cases illustrate. Case study [8.2610] The first plaintiff was the maker of the television program “Sesame Street” and the second plaintiff was the owner of copyright in the Muppet characters appearing on the television program. The plaintiffs had licensed a large range of products for sale, including plush toys, which reproduced the essential characteristics of the Muppet characters and were made under strict quality control. The first defendant began selling in their retail stores in New South Wales a number of plush toys made in Korea which were alleged to be copies of those sold under licence from the plaintiffs. In granting the interlocutory injunction sought by the plaintiffs restraining the sale of the toys by the defendants, Helsham J found that the public knew the first plaintiff made the television program and associated the Muppet characters with them; that it was well known that the creators of this type of fictional character license others to manufacture or deal in products which are representations of those characters; that the evidence established that the public believed that the plush toys being sold in Australia were sold under licence under some sort of arrangement with the producers of the television show, that is, the plaintiffs; and that the toys sold by the defendants were all intended to be representations of the television characters and could pass as such: Childrens Television Workshop Inc v Woolworths (NSW) Ltd [1981] 1 NSWLR 273.

Case study [8.2620] The appellant produced a television advertisement for its shoes which was easily recognisable as being a parody of the famous “knife scene” from the film Crocodile Dundee starring the respondent, actor Paul Hogan. In an action for, inter alia, passing off, the Full Court of the Federal Court upheld the trial judge's finding that a significant section of those seeing the advertisement would be misled into believing that the actor had given his approval for the use of the film's characters and images under some commercial arrangement with the appellant: Pacific Dunlop Ltd v Hogan (1989) 23 FCR 553; see similarly, Hogan v Koala Dundee Pty Ltd (1988) 20 FCR 314.

46

Industrial Property Advisory Committee, The Legal Protection of Character Merchandising in Australia (March 1988), p 2.

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Case study [8.2630] The plaintiffs were the producers of the cartoon series “The Simpsons”. They had adopted “Duff Beer” as the name of an imaginary beer associated with a leading character of the series, Homer Simpson. The defendant, a South Australian brewer, promoted a new beer entitled “Duff Beer”. The plaintiffs succeeded in their claim that the defendant’s use of the name “Duff Beer” constituted misleading and deceptive conduct in contravention of s 52 of the Trade Practices Act 1974 (Cth) (now s 18 of the Australian Consumer Law 47), and amounted to passing off the defendant’s product as being associated with “The Simpsons”: Twentieth Century Fox Film Corp v South Australian Brewing Co Ltd (1996) 66 FCR 451; 34 IPR 247.

[8.2640] An action for passing off has similarly been used to restrain a trader from misrepresenting that a well-known person has a connection with the trader’s product or business: Case study [8.2650] The plaintiffs were two well-known professional ballroom dancers. The defendants put out a record of ballroom dancing music showing a photograph of the plaintiffs on the cover without their consent. The New South Wales Full Supreme Court upheld the plaintiffs' claim in passing off since their potential to exploit the goodwill in their names and reputation had been damaged by the defendants' conduct: Henderson v Radio Corp Pty Ltd (1960) 60 SR (NSW) 576.

[8.2660] In contrast, an action for passing off did not succeed in the following case: Case study [8.2670] An action photograph of the applicant, a well-known champion athlete, was used on a poster produced by Australian Airlines to promote sport, the poster bearing the name of the Airline and logo in small print. The photograph was later used with the Airline's permission on the front cover of a book and magazine published by a religious organisation. The applicant's permission had not been sought in either case. The applicant’s action for, inter alia, passing off failed since it was held that he was unable to establish that “a reasonably significant number of persons seeing the poster, the magazine or the book, would draw or be likely to draw from them the message that the applicant was giving his indorsement to Australian Airlines or to [the religious organisation]”: Honey v Australian Airlines Ltd (1989) 14 IPR 264 at 283 per Northrop J. 47

The Australian Consumer Law is Sch 2 to the Competition and Consumer Act 2010 (Cth) (formerly the Trade Practices Act 1974 (Cth)). [8.2670] 463

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Remedies [8.2680] The principal remedy sought in passing off actions is an injunction to restrain the defendant from engaging, or continuing to engage, in the conduct complained of. In an appropriate case, the plaintiff may also recover damages or an account of profits: Apand Pty Ltd v Kettle Chip Co Pty Ltd (No 2) (1999) 88 FCR 568.

Other remedies [8.2690] Where the passing off in question concerns a registered trade mark, then it may be more appropriate to seek a remedy under the Trade Marks Act 1995 (Cth) rather than by way of the common law action for passing off. In many instances, the conduct in question may also involve contravention of the Australian Consumer Law, 48 in particular, contravention of s 18 proscribing a person (including a corporation) in trade or commerce from engaging in misleading or deceptive conduct, or conduct which is likely to mislead or deceive, and a remedy sought under that legislation as an alternative to an action for passing off.

CONFIDENTIAL INFORMATION Nature of the action for breach of confidence [8.2700] Where one person imparts information to another in confidence and the latter uses that information for their own purposes or discloses it to third parties without permission, then an action for breach of confidence may be available to the person who provided the information. In contrast to, for example, patent protection, there are no disclosure or registration requirements to be complied with before legal proceedings for breach of confidence may be instituted. In certain circumstances, protection is provided which may not otherwise be available, for example, ideas of commercial significance which are imparted to another in confidence may be protected from unauthorised disclosure or use by the recipient. Commercial, industrial or scientific information confidential to a business (usually referred to as “trade secrets”) may be protected by an action for breach of confidence, for example, engineering drawings and manuals (Warman International v Envirotech Australia Pty Ltd (1986) 11 FCR 478), techniques, processes, formulae and customer lists. However, the action is not limited to such matters and the type of information which may be protected is diverse and extends, for example, to information contained in confidential government documents or information of a personal nature: Argyll v Argyll 48

The Australian Consumer Law is Sch 2 to the Competition and Consumer Act 2010 (Cth) (formerly the Trade Practices Act 1974 (Cth)).

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[1967] 1 Ch 302. An action for breach of confidence has also been used to limit the dissemination of Aboriginal tribal secrets disclosed to an anthropologist (Foster v Mountford and Rigby Ltd (1977) 14 ALR 71), and to recover damages for the unauthorised use of the concept for a television program divulged in confidence: Talbot v General Television Corp Pty Ltd [1980] VR 224. Case study [8.2710] The plaintiffs were the members of a pop group who developed an idea for a television series based on the experiences of the group. The series was to emphasise the unusual feature of a rock group of three girls, each of whom was an established actress, and was to be part fact and part fiction. One of the plaintiffs orally communicated the idea in confidence to one of the defendants, a scriptwriter, who expressed interest in the idea. Protracted negotiations with the other defendants, a producer and a television company, eventually broke down. Subsequently, the television company screened 12 episodes of a series in which the plaintiffs' idea was put into effect without their agreement. It was held that the defendants had breached their obligation not to use the plaintiffs’ idea, which had been communicated in confidence, for their own benefit. The judge said: “This of course does not mean that every stray mention of an idea by one person to another is protected. To succeed in his claim the plaintiff must establish not only that the occasion of communication was confidential, but also that the content of the idea was clearly identifiable, original, of potential commercial attractiveness and capable of being realised in actuality”: Fraser v Thames Television [1984] 1 QB 44 at 66 per Hirst J.

[8.2720] To succeed in an action for breach of confidence the following elements need to be satisfied: 1.

The information must have the necessary quality of confidence about it, that is, it must be confidential or secret in nature and not public property or public knowledge. For a concept to be protected as a “trade secret” it must have some quality of novelty or originality which makes it recognisable as potentially valuable, be capable of precise statement and not merely speculative: Secton Pty Ltd (t/a BWN Industries) v Delawood Pty Ltd (1991) 21 IPR 136. If the plaintiff makes the information known to the public, or a relevant section of it, then the information is no longer confidential and no action will lie, for example, the publication of a patent specification precludes a claim of confidentiality in respect of the information contained in it: O Mustard & Son v Dosen [1964] 1 WLR 109.

2.

The information must be imparted in circumstances where the recipient knows, or ought reasonably to know, that the information is confidential. “It seems to me that if the circumstances are such that any reasonable man standing in the shoes of the recipient of the information would [8.2720] 465

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have realised that upon reasonable grounds the information was being given to him in confidence, then this should suffice to impose upon him the equitable obligation of confidence”: Coco v AN Clark (Engineers) Ltd [1969] RPC 41 at 48 per Megarry J. 3.

There must be an unauthorised use of the information imparted. Thus, there will be no breach of confidence if the information in question has been derived independently. A third party who receives confidential information as a result of another’s breach of confidence may be restrained from using or disclosing the information once they have actual or constructive notice of the breach: Ansell Rubber Co Pty Ltd v Allied Rubber Industries Pty Ltd [1967] VR 37.

In addition to the equitable action for breach of confidence, a contract may expressly or by implication impose an obligation of confidence upon the other contracting party in respect of confidential information to be supplied under the contract. For example, when parties commence negotiations in respect of the possible commercialisation of an invention they may enter into a confidentiality agreement to treat information about the invention as confidential. However, if the terms of such an agreement are drawn too widely, for example by seeking to preserve the obligation of confidentiality forever, they may be held to be invalid and unenforceable by the application of the doctrine of restraint of trade: Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181.

Public interest defence [8.2730] In certain circumstances, a defendant may rely on the defence of disclosure of the confidential information in the public interest. However, the scope of this defence is limited and it has been said that it does not extend beyond disclosure of matters in breach of the country’s security, or in breach of law, including statutory duty, fraud, or otherwise destructive of the country or its people, including matters medically dangerous to the public; and doubtless other misdeeds of similar gravity: Beloff v Pressdram Ltd [1973] 1 All ER 241 at 260 per Ungoed-Thomas J; compare Commonwealth v John Fairfax & Sons Ltd (1980) 147 CLR 39.

Remedies [8.2740] The remedies available in an action for breach of confidence are an injunction to restrain disclosure or use of the information, damages (Talbot v General Television Corp Pty Ltd [1980] VR 224), or an account of profits for improper use of the confidential information: Peter Pan Manufacturing Corp v Corsets Silhouette Ltd [1964] 1 WLR 96; RLA Polymers Pty Ltd v Nexus Adhesives Pty Ltd (2011) 280 ALR 125. 466 [8.2730]

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Employee obligations [8.2750] Issues concerning breach of confidence often arise in the relationship of employer and employee. The general principles discussed at [8.2700] regarding breach of confidence apply to employees. In addition, an obligation of confidence may arise from the express or implied terms of the employee’s contract of employment as regards confidential information of the employer. It is common for contracts of employment to contain a provision to the effect that the employee will not disclose trade secrets acquired in the course of the employee’s employment. However, the position is further complicated in that during the employment relationship the employee is subject to a duty of fidelity to their employer not to use confidential information except for the purposes of their employment: Angus & Coote Pty Ltd v Render (1989) 16 IPR 387. Disputes often arise as to the extent to which an employer is entitled to protect confidential information acquired by an employee during the period of employment after the employee has left their employment. Determination of the issue will depend on the nature of the information acquired by the employee and the particular provisions of the contract of employment: Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317. In the absence of contractual restraints restricting the employee’s post-employment freedom (which are subject to the common law doctrine of restraint of trade proscribing undue interference with trade, see [8.360]), the question will be whether use or disclosure of the information by the employee is actionable as a breach of confidence, or whether it has become part of the former employee’s skill and know-how which they are entitled to use for their own or a future employer’s benefit. Case study [8.2760] As part of her employment an employee had compiled an address book of her employer's customers, which was confidential information. After her employment was terminated, the employee retained this address book. The Full Court of the South Australian Supreme Court held that the employee’s equitable obligation of confidence required her to return the address book. The court pointed out that it was a breach of confidence if an employee surreptitiously makes a list of customers for use after leaving their employment. The same principles applied where the list of customers was legitimately compiled as part of the employee’s work for their former employer: NP Generations Pty Ltd v Feneley (2001) 80 SASR 151.

[8.2760] 467

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FRANCHISING Nature of franchising [8.2770] Franchising is not a separate category of intellectual property. However, intellectual property rights are often a significant feature of franchise agreements. The increasing importance of the franchising industry in Australia requires some discussion of its basic features. Basically, franchising is a particular business arrangement by which individuals (called franchisees) distribute or sell a product, or run a business developed by another (called the franchisor) utilising the trade marks, trade names, product, know-how or confidential information of the franchisor. The franchisor normally provides ongoing support services in the form, for example, of training, marketing strategies and group advertising. Broadly, commercial franchising in Australia comprises three types of business arrangement, namely: (a)

product franchises, where the franchisee acts as the distributor of a particular product (for example, the retailing of motor vehicles or petrol);

(b)

system franchises, where a franchisor develops a unique or individual manner of doing business and permits the franchisee to use that system in a controlled way in the operation of the franchisee’s business (for example, fast food outlets, laundries and dry cleaners); and

(c)

processing or manufacturing franchises where the franchisor provides an essential ingredient or know-how to a processor or manufacturer (as, for example, in the soft drink industry).

The most significant of these various forms of franchising is system franchising or, as it is now more commonly referred to, business format franchising. The latter has developed rapidly in Australia in recent years and the discussion which follows is essentially directed to this form of franchising. Basically, business format franchising is a method of marketing goods and services utilising an already established successful business format under a trade name or brand. The franchisor sells to the franchisee the right to use the business format including, for example, the name or trade mark of the business, product or service. The franchisee normally also pays a fee, usually based on a percentage of turnover, to the franchisor for advertising and other support services. The benefits of a franchise from the franchisee’s point of view are that: (a)

the franchisee benefits from the name, reputation and goodwill already gained by the franchisor;

(b)

the franchisee is assisted by technical, marketing and other support systems provided by the franchisor which are not available to the sole trader;

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(c)

the risk of failure tends to be reduced since the franchisee is usually buying into a successful business; and

(d)

generally, less capital is required to enter a franchise than to try to establish a new business.

The advantage to the franchisor is the ability to expand rapidly utilising capital provided by the franchisees. On the other hand, the disadvantages of a franchise include misrepresentation by the franchisor of the opportunities offered by the franchise, for example, profit projections may be unrealistic, and the promise of continued interest and support services may not be fulfilled because of the franchisor’s subsequent inability or unwillingness to supply them. Furthermore, on expiry or termination of the agreement the franchisee has no right to continue operating the business and no right, in the absence of a specific provision in the agreement, to any goodwill that may have accrued to the franchise while it was operated by the franchisee: Ranoa Pty Ltd v BP Oil Distribution Ltd (1989) 91 ALR 251. 49

Franchise agreement [8.2780] There will normally be a written franchise agreement between the franchisor and the franchisee governing the legal aspects of their relationship. The agreement will deal with the nature and extent of the rights granted by the franchisor to the franchisee including the formal granting of rights to use the franchisor’s trade marks, trade names, copyright materials and the franchisor’s business system and know-how. The franchise agreement will usually specify the nature and extent of the services to be provided by the franchisor to the franchisee both initially and on a continuing basis, for example training and supply of equipment. The franchisee will undertake to comply with the operating, accounting and other administrative systems of the franchise which will be detailed in the franchisor’s operations manual. The franchise agreement will usually specify the period of its duration and allow the franchisee a right of renewal. Other typical provisions will include the procedure to be adopted in the event of the franchisee wishing to sell the business; provision for the termination of the agreement in the event of default by the franchisee; and a procedure for the resolution of disputes, for example, arbitration or some other method of alternative dispute resolution.

49

See further, J Buchan, “Franchising: A Honey Pot in a Bear Trap” (2013) 34 Adelaide Law Review 283; A Terry and J Huan, “Liability for Franchisee Conduct” (2014) 39 Monash University Law Review 388. [8.2780] 469

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Franchising Code of Conduct [8.2790] A national Franchising Code of Conduct first came into effect on 1 July 1998 and was amended a number of times. Significantly, a new Franchising Code of Conduct came into effect from 1 January 2015. 50 The purpose of the Code is to regulate the conduct of participants in franchising by, for example, requiring comprehensive disclosure requirements with the object of assisting franchisees and franchisors to make an informed decision prior to entering into a franchise agreement; prescribing minimum standards in franchise agreements; and providing for the resolution of disputes between franchisors and franchisees. The Code is a prescribed mandatory industry code under Pt IVB of the Competition and Consumer Act 2010 (Cth) (formerly the Trade Practices Act 1974 (Cth)), the effect of which is that the remedies provided by the latter Act will apply to contraventions of the provisions of the Code. The principal requirements under the new Franchising Code of Conduct include the following: 1.

2.

50

Obligation to act in good faith. The new Code introduces an obligation on the parties to a franchise agreement to act in good faith (Sch 1, cl 6). The obligation applies both to franchisors and franchisees in respect of any matter arising under or in relation to the franchise agreement or the Code. The meaning of “good faith” under the Code is the same as at common law. While “good faith” is not defined, the Code provides that the court in determining whether a party has contravened the obligation may have regard to: (a) whether the party acted honestly and not arbitrarily; and (b) whether the party cooperated to achieve the purposes of the agreement. The obligation to act in good faith cannot be limited or excluded by the franchise agreement. Disclosure by the franchisor. The franchisor must provide a disclosure document to a prospective franchisee (or a franchisee proposing to renew or extend a franchise) together with a copy of the Code at least 14 days before the franchise agreement is entered into (Sch 1, cll 8 and 9). The disclosure document must contain the comprehensive information set down in Annexure 1 of the Code including: the names and qualifications of the franchisor’s directors; a summary of the franchisor’s business experience; details of criminal or civil proceedings against the franchisor; the number of existing franchises and details of their franchisees; and the number of franchises terminated or not renewed over the past three years. Information about the franchise itself is to include: details of the territory of the franchise and whether the franchisor may grant other franchises in the area; requirements as to the purchase of goods and The new Franchising Code of Conduct is contained in Sch 1 to the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth). In general, the new Code applies to conduct occurring on or after 1 January 2015 in relation to a franchise agreement entered into on or after 1 October 1998 (see further, Sch 1, cl 3 ).

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services from the franchisor and restrictions on the purchase of goods or services by the franchisee from other sources; disclosure in relation to the respective rights and obligations of the parties to conduct and benefit from online trading activities; details of any central marketing or advertising fund to which the franchisee has to contribute; and details as to the establishment costs to start operating the business. Financial information as to the profitability of the franchisor must also be provided. The disclosure document must be updated annually. The purpose of a disclosure document is to give to a prospective franchisee, or a franchisee proposing to renew or extend a franchise agreement, information from the franchisor to help the franchisee to make a reasonably informed decision about the franchise. 3.

4.

5.

Information statement. A franchisor must give a copy of the short information statement about franchising set out in Annexure 2 of the Code to a prospective franchisee as soon as practicable after the latter applies or expresses an interest in acquiring a franchised business (Sch 1, cl 11). The information statement covers issues such as due diligence, what is involved in a franchising relationship, unexpected expenses, the risks of franchising and where to find more information. Cooling off period. A franchisee may terminate an agreement within seven days of entering into the agreement (Sch 1, cl 26). A franchisee who exercises this right is to be refunded, within 14 days, all moneys paid under the agreement less the reasonable expenses of the franchisor specified in the agreement. Dispute resolution. The Franchising Code contains provisions for resolving disputes between the parties to a franchise agreement (Sch 1, cll 34–45). A franchise agreement must provide for a complaint-handling procedure which complies with the Code. The procedure essentially involves the party who has a dispute setting out the nature of the dispute in writing and stating what action the complainant thinks will settle the dispute. The parties should then try to agree about how the dispute is to be resolved. If the parties cannot reach an agreement within three weeks, then either party may refer the matter to a mediator. In the event of the parties not agreeing about who should be the mediator, either party can ask the mediation adviser (appointed for this purpose by the Minister) to appoint a mediator. The mediator can determine the time and place for mediation and the parties are required to attend the mediation to try to resolve the dispute. This procedure does not affect the right of a party to take legal proceedings under the franchise agreement.

Non-compliance with the requirements of the Code does not have the effect of the franchise agreement being illegal and unenforceable: Master Education Services Pty Ltd v Ketchell (2008) 236 CLR 101. However, non-compliance will amount to a contravention for which remedies are available under the Competition and Consumer Act 2010 (Cth) (formerly the Trade Practices Act 1974 (Cth), Pt VI). For example, the Full Federal Court set aside a franchise [8.2790] 471

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agreement when the franchisors breached the Franchising Code of Conduct by not providing a current disclosure document; the franchisees would not have entered into the franchise agreement had they known the true financial position of the franchisor: Spar Licensing Pty Ltd v Mis Qld Pty Ltd (2014) 314 ALR 35 (FCAFC); see also, Rafferty v Madgwicks (2012) 203 FCR 1 (FCAFC); Workplace Safety Australia Pty Ltd v Simple OHS Solutions Pty Ltd (2015) 89 NSWLR 594 (NSWCA). The Australian Competition and Consumer Commission (ACCC) is responsible for enforcing the provisions of the Code and, accordingly, may take action against a franchisor for non-compliance with the Code. The new Franchising Code of Conduct prescribes a civil penalty of 300 penalty units (currently $54,000) for non-compliance with many of the requirements of the Code discussed above. 51 The ACCC is now empowered to issue an infringement notice where it has reasonable grounds to believe that a person has contravened a civil penalty provision of the Code. 52 The amount of the penalty is 50 penalty units ($9,000) for a body corporate and 10 penalty units ($1,800) for a person. Where a person who has been issued with an infringement notice pays the amount of the penalty, no proceedings may be started or continued against the person by or on behalf of the Commonwealth in relation to the alleged contravention of the civil penalty provision.

Other provisions of the Competition and Consumer Act 2010 relevant to franchisees [8.2800] Prior to the advent of the Franchising Code of Conduct, the principal avenue of redress for franchisees who had been induced to enter into a franchise agreement as a result of misrepresentations by franchisors was to bring proceedings for misleading and deceptive conduct under s 52 of the Trade Practices Act 1974 (Cth) (now s 18 of the Australian Consumer Law 53). For example, the Federal Court awarded damages to a franchisee who had suffered substantial financial loss in a retail franchise business which had been represented by the franchisor as a completely proven concept and where there had been misrepresentations as to anticipated turnover and profitability, risk and site suitability: Bateman v Slatyer (1987) 71 ALR 553; see similarly Cut Price Deli Pty Ltd v Jacques (1994) 49 FCR 397; Australian Competition and Consumer Commission v Taxsmart Group Pty Ltd [2014] ATPR 42-473; [2014] FCA 487; cf Traderight (NSW) Pty Ltd v Bank of Queensland Ltd [2015] NSWCA 94 (see 51 52 53

The civil pecuniary penalties may be imposed by a court under the Competition and Consumer Act 2010 (Cth), s 76 as amended by the Competition and Consumer Amendment (Industry Code Penalties) Act 2014 (Cth), ss 6–8. The Competition and Consumer Act 2010 (Cth), ss 51ACC–51ACJ as amended by the Competition and Consumer Amendment (Industry Code Penalties) Act 2014 (Cth), s 3. The Australian Consumer Law is Sch 2 to the Competition and Consumer Act 2010 (Cth) (formerly the Trade Practices Act 1974 (Cth)).

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further as to s 18 of the Australian Consumer Law). The unconscionable conduct provision of s 22 of the Australian Consumer Law may also be apposite to a franchisee in an appropriate case.

Further reading C Bodkin, Patent Law in Australia (2nd ed, Thomson Reuters, Sydney, 2013). K Bowrey, M Handler, D Nicol and K Weatherall, Australian Intellectual Property (2nd ed, Oxford University Press, Melbourne, 2015). R Burrell and M Handler, Australian Trade Mark Law (2nd ed, Oxford University Press, Melbourne, 2016). MJ Davison, AL Monotti and L Wiseman, Australian Intellectual Property Law (3rd ed, Cambridge University Press, Melbourne, 2012). A Fitzgerald and D Eliades, Introduction to Intellectual Property (Thomson Reuters, Sydney, 2015). S Ricketson and C Cresswell, The Law of Intellectual Property: Copyright, Designs and Confidential Information (subscription service, Thomson Reuters, Sydney). A Stewart, P Griffith, J Bannister and A Liberman, Intellectual Property in Australia (5th ed, LexisNexis Butterworths, Sydney, 2014). W van Caenegem, Intellectual and Industrial Property (LexisNexis Butterworths, Sydney 2014).

Internet sites Australasian Legal Information Institute (AustLII) http://www.austlii.edu.au (decisions of courts, Designs Office, Patents Office, Trade Marks Office, Copyright Tribunal) Australian Copyright Council http://www.copyright.org.au (information on copyright issues) IP Australia http://www.ipaustralia.gov.au (extensive materials concerning patents, trade marks and designs) Franchise Council of Australia http://www.franchise.org.au

Journals Australian Intellectual Property Journal Australian Intellectual Property Law Bulletin Copyright Reporter

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TOPIC 9 Business Organisations General principles ............................................................................ Non-corporate forms of association ..................................................... Corporate forms of association............................................................ Incorporated associations................................................................... Companies registered under the Corporations Act .................................. Registration..................................................................................... Which bodies must be registered? ....................................................... Incorporation .................................................................................. Registration..................................................................................... Australian Company Numbers (ACNs) and Australian Business Numbers (ABNs) ....................................................................................... Company names.............................................................................. Consequences of registration.............................................................. Effect of registration.......................................................................... Corporate veil.................................................................................. Lifting the corporate veil.................................................................... Corporate groups.............................................................................

[9.10] [9.20] [9.360] [9.420] [9.560] [9.710] [9.710] [9.750] [9.770] [9.810] [9.820] [9.850] [9.850] [9.900] [9.920] [9.960]

Extract from J Yogaratnam and L Xynas, Corporations Law: In Principle (10th ed, Lawbook Co., 2017), Chapters 2, 3 and 4.

GENERAL PRINCIPLES [9.10] There exist a number of different types of business structures in the Australian economy. Typically, a business will incorporate if a company structure provides the necessary advantages and flexibility for its day-to-day activities. However, at times other non-corporate business organisations may be appropriate. Whether a business decides to incorporate or not will usually depend on the needs of its operator. Companies have proven to be popular because they provide a number of advantages including taxation considerations, limited liability and succession planning. Non-corporate business structures such as partnerships, unincorporated associations, joint ventures, trusts and sole operators have also desirable qualities. Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act) [9.12] Prior to the CATSI Act, the Aboriginal Councils and Associations Act 1976 (Cth) (ACA Act) allowed for two types of corporate bodies, that is, Aboriginal councils (Part III of the ACA Act) and Aboriginal associations (Part IV of the ACA Act). The former was aimed to meet the incorporation needs of Indigenous communities which provided government-type services. The latter was aimed at providing Indigenous people with an expedient business entity to achieve [9.12] 475

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various objectives so they could conduct a business enterprise which generate profits for its members. The ACA allowed for Indigenous Australians to operate their businesses not only in a culturally appropriate manner but in accordance with Aboriginal and Torres Strait Islander custom. Following various reviews from 1989 to 2002 to reform the ACA Act (Cth), the CATSI Act was introduced in 2006. Unlike the ACA Act (Cth), the 2006 legislation disallowed for incorporations in the form of Aboriginal councils. However such Indigenous councils would still be created at the state and territory level. The registration process and procedure of an Aboriginal and Torres Strait Islander corporation is found in Parts 2-1 to 2-4 of the CATSI Act. Division 37 of the CATSI Act deals with registration of an Indigenous corporation as a small, medium or large size corporation. The Dictionary section in Part 17-3 Division 700 of the CATSI Act provides for the following meaning of key words: Aboriginal and Torres Strait Islander person means the following: (a)

an Aboriginal person;

(b)

a Torres Strait Islander;

(c)

an Aboriginal and Torres Strait Islander person;

(d)

a Torres Strait Islander and Aboriginal person;

(e)

an Aboriginal and Torres Strait Islander corporation;

(f)

a body corporate prescribed by name in the regulations for the purposes of this paragraph;

(g)

a body corporate that falls within a class of bodies specified in the regulations for the purposes of this paragraph;

(h)

a body corporate in which a controlling interest is held by any, or all, of the following persons: (i)

Aboriginal persons;

(ii)

Torres Strait Islanders;

(iii)

Aboriginal and Torres Strait Islander persons;

(iv)

Torres Strait Islander and Aboriginal persons.

Aboriginal person means a person of the Aboriginal race of Australia. body means a body corporate or an unincorporated body and includes, for example, a society or association. entity: for the purposes of Part 6-6, an entity is any of the following: (a)

a body corporate;

(b)

a partnership;

(c)

an unincorporated body;

(d)

an individual;

(e)

for a trust that has only 1 trustee–the trustee;

(f) for a trust that has more than 1 trustee–the trustees together. Otherwise, entity has the meaning given by section 694-40. 476 [9.12]

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body means a body corporate or an unincorporated body and includes, for example, a society or association.

Non-corporate forms of association [9.20] The main non-corporate forms of association are: (a)

sole trader;

(b)

partnership;

(c)

trust;

(d)

unincorporated not-for-profit association; and

(e)

unincorporated joint venture.

In order to better understand the nature of the different types of business entities, the following provides a general outline of unincorporated business structures. A comparative table is also provided at [9.240] which contains the key characteristics of each business association.

Sole trader [9.30] Operating as a sole trader is the simplest form of business organisation (it is not strictly correct to describe a sole trader as an “association” because the concept of an association inherently involves more than one person). Nothing is required to establish a structure – one person simply “owns” the business, although they may employ others and operate under a business name. Because there is no separate body, the assets and liabilities of the business cannot be separated from those of the individual owner. Thus there is no real or genuine separation of ownership from management. This form of organisation has the attraction of simplicity and control. Profits do not have to be shared and no-one (for example, members) has to be consulted or informed about how the business is running. Unlike a company or an incorporated association, the only public filing requirement is the need to obtain an Australian Business Number (ABN) and if necessary, register for the goods and services tax (GST). If the business is not to be carried on in the name of the sole trader, it will be necessary to register a business name with ASIC. This can now be done via ASIC Connect which is their new online service for interacting with ASIC’s registers. See ASIC Connect, available at: https:// www.connectonline.asic.gov.au/HLP/using-this-service/how-to-use-asicconnect/WelcometoASICConnect/index.htm. Hence, a sole trader enjoys a very high degree of commercial privacy. The other side of the coin is that a sole trader is personally liable for any unpaid debts of the business, meaning that a sole trader’s personal assets (such as her or his home) will be sold to meet any shortfall. There is also no formal [9.30] 477

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legislative process to enable another person to inherit the business. Death or incapacity of the sole trader may bring the business to an end.

Partnership [9.40] A “partnership” is generally defined as relationship that exists between people (which includes companies) who carry on a business in common with a view to making profits. See for example: Partnership Act 1892 (NSW), s 1; Partnership Act 1891 (Qld), s 5; and Partnership Act 1958 (Vic), s 5. A partnership can be viewed as an aggregate of individual people or traders who have come together for a joint, profit-making business purpose. The “people” can be either individuals, companies or other bodies corporate. It is important to distinguish partnerships from other unincorporated business associations, such as joint ventures.

Legal basis [9.50] A partnership is essentially a matter of contract. The individual partners enter into a contract (the partnership agreement) as to how they will conduct the partnership business. Subject to any contrary statutory provisions, the mutual rights and obligations of each partner are governed by this agreement. A partnership agreement may be: (a)

a formal written agreement;

(b)

partly in writing and partly oral; or

(c)

may be purely oral or wholly or partly implied from the conduct of the partners.

Statutory regulation [9.60] Each State and Territory has its own legislation governing partnerships. These Partnership Acts are not a Code, and are primarily a consolidation of the most important of the pre-existing general law rules applying to partnerships. References to section numbers in this part of Topic 9 are to the Partnership Act 1958 (Vic). The Partnership Acts expressly provide that the pre-existing rules continue to apply except in so far as they are inconsistent with the Partnership Acts: see for example, s 4 (Vic). To a large extent the Partnership Acts operate as default provisions and apply subject to, or in the absence of, any contrary provisions in a partnership agreement. In substance the Partnership Acts are almost identical, although the section numbers vary. For provisions in other State and Territory Acts see the Comparative Table 2.4 under Guide to Problem Solving section at the end of this Chapter and in KL Fletcher, The Law of Partnership in Australia (9th ed, Thomson Lawbook Co, 2007) pp xli-lii (Yogaratnam).

Formation [9.70] Forming a partnership does not involve any initial formalities, such as registration and there are no ongoing requirements to lodge returns of any 478 [9.40]

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kind (although a partnership tax return would be completed). The partners may trade under their own names or may use a business name. This can now be done via ASIC Connect which is their new online service for interacting with ASIC’s registers. See ASIC Connect, available at: https:// www.connectonline.asic.gov.au/HLP/using-this-service/how-to-use-asicconnect/WelcometoASICConnect/index.htm Additionally, each registration has an Australian Business Number: see http://www.abr.gov.au. The partners are collectively described as a “firm” and the name in which they carry on business is called the firm name: Partnership Act 1958 (Vic), s 8 (for other States and Territories see the Comparative Table 2.4 under Guide to Problem Solving section at the end of this Chapter (Yogaratnam)).

Legal nature [9.80] A partnership is a relationship, it is not a separate legal entity, although, for procedural convenience, Rules of Court allow a partnership to sue or be sued in the partnership or firm name: see, for example, Supreme Court (General Civil Procedure) Rules 2015 (Vic), O 17. A partnership is not an entity in its own right – that is, the “partnership” does not exist separately from the partners themselves; and as a result: • each partner pays tax at her or his individual rate (a return is lodged for the partnership, but only for the purpose of ascertaining each partner’s share of the profit or loss); • a partnership is automatically dissolved on the retirement, death or bankruptcy of a partner unless the partnership agreement provides otherwise; and • a partner can assign her or his interest in the partnership but, unless all the other partners consent, the assignee only has the right to receive the assignor’s share of profits and has no right to take any part in the management of the firm. Retiring partners remain liable for debts incurred while they were partners, unless creditors agree to a release. The maximum size of a partnership is limited. Section 115 of the Corporations Act 2001 (Cth) limits the number of members to 20. There are some exceptions allowing a greater number of members. For example, there is a maximum of 50 members for partnerships involving medical practitioners and stockbrokers, 100 for architects, chemists and veterinary surgeons, 400 for legal practitioners and 1,000 for accountants: see Corporations Regulations 2001 (Cth), reg 2A.1.01. Any partnership that exceeds this size must register under the Corporations Act 2001 (Cth).

[9.80] 479

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What constitutes a partnership? [9.90] A partnership does not exist unless each of the elements in the statutory definition is satisfied: s 5 (Vic). This definition requires there to be: • an existing relationship; • between persons who are; • carrying on a business in common; and • have a view to profit. If each of these elements are present, then a partnership exists regardless of the intention of the people involved. If the situation fits the definition in the Partnership Acts, a partnership exists: see Canny Gabriel Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321. It is necessary to examine each of these elements to determine the existence of a partnership. For example, when looking at the need to be “carrying on a business in common” the Partnership Acts define “business” as including every trade, occupation or profession s 3 (Vic). Then the element of carrying on a business can be explored even if the business has only one transaction. In Re Griffin; ex parte Board of Trade (1890) 60 LJQB 235 at 237 Lord Esher MR commented: I take the test to be this: if an isolated transaction … is proved to have been undertaken with the intent that it should be the first of several transactions, that is, with the intent of carrying on a business, then it is a first transaction in an existing business. The business exists from the time of the commencement of that transaction with the intent that it should be one of a series.

The Australian courts have also contemplated that a single transaction could, depending on the circumstances, amount to the carrying on of a business. In United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1 Dawson J espoused at 15 that: A single adventure under our law may or may not, depending upon its scope, amount to the carrying on of a business … Whilst the phrase “carrying on a business” contains an element of continuity or repetition in contrast with an isolated transaction which is not to be repeated … the emphasis which will be placed upon continuity may not be heavy.

Another aspect of this definitional element is that the carrying on of the business is done “in common”. Here it appears that the partners who are running the business must do so for all partners and not just for themselves. There is, therefore, a true mutuality of rights and obligations between the partners. The definition’s final element is that the partners “have a view to profit” and there will be a profit if a comparison of the balance sheet at two different times shows an increase at the later time. The requirement to have a view to profit serves to exclude clubs and societies that have their own legislative treatment elsewhere and are not governed by the Partnership Acts. 480 [9.90]

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Because a partnership agreement need not be in writing, it may sometimes be difficult to determine whether a partnership exists. The statutory rules of construction provide some guidelines, but do not go as far as creating a presumption of partnership: s 6 (Vic). It is always necessary to look carefully at all the facts in any given case. If a person shares in the net profits of a business, as opposed to the gross returns, that is prima facie evidence that the person is a partner in the business: s 6(2) – (3) (Vic). However, sharing in net profits does not necessarily make a person a partner, in particular in the circumstances listed in s 6(3) (Vic): see Cox v Hickman (1860) 8 HL Cas 268; 11 ER 431; Re Megevand; Ex parte Delhasse (1878) 7 Ch D 511; Cox v Coulson [1916] 2 KB 177. The distinction between an agreement to share the gross returns as opposed to the net profits is well illustrated by the following High Court decision. Cribb v Korn [9.100] Cribb v Korn (1911) 12 CLR 205 (High Court of Australia) FACTS: Cribb owned a farming property. He agreed to allow Rano to use two of the paddocks for farming purposes. Cribb agreed to provide the land, tools and the livestock while Rano would provide labour. They agreed to each take half of the gross proceeds of the sale of the eventual produce. Rano employed Korn to help work the land and Korn was injured in the course of his employment. Korn sued both Rano and Cribb, alleging that they were partners and so were jointly liable as his employers. DECISION: The High Court held that Rano and Cribb were not partners as they had not agreed to carry on business in common. There was no evidence to show that Cribb had intended to be involved in farming the paddocks. All he had done was agree to allow Rano to use the paddocks and equipment in return for an agreed sum – half the gross proceeds of sale. Rano, not Cribb was entitled to the eventual profits.

Partnerships and outsiders Authority of a partner to bind the firm [9.110] Because partners carry on business in common with a view to profit, each partner is both a principal in the business and the agent of the firm and each of the other partners. Transactions entered into by one partner which are within the usual scope of the firm’s business will normally bind both the firm and the other partner(s). Whether or not the other partners have authorised that transaction is irrelevant. If the transaction is one which can be said to be “carrying on in the usual way business of the kind carried on by the firm”, the other party is entitled to assume that the partner is authorised to act and the other partners and the firm will normally be bound: ss 9 – 12 (Vic). The exceptions are:

[9.110] 481

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• if the partner was acting without authority and the other party knows this; or • the other party does not know or believe that he or she is a partner in the business: s 9 (Vic). See the discussion of actual and ostensible authority in Topic 12; Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985) 155 CLR 541; Goldberg v Jenkins (1889) 15 VLR 36. The following case illustrates what is meant by “carrying on in the usual way business of the kind carried on by the firm”. Mercantile Credit v Garrod [9.115] Mercantile Credit Co Ltd v Garrod [1962] 3 All ER 1103 (Queen’s Bench Division) FACTS: Garrod and Parkin were partners running a garage. Garrod was a “sleeping partner” who took no part in running the business. The partnership agreement expressly excluded buying and selling motor vehicles from the scope of the partnership business. In breach of this agreement and without telling Garrod, Parkin fraudulently sold a car to a third party who later sued both partners for the return of the purchase price. Garrod’s argument that he was not liable because Parkin had no actual or ostensible authority to act on behalf of the firm, failed. DECISION: The court held that even though the partnership agreement expressly excluded selling motor vehicles, this was the kind of business that would normally be carried on by a garage and so Garrod was liable. People who are carrying on business together are often keen to argue that they are not in partnership. The main reason for this is that a partner can be liable for the actions of a fellow partner even when that partner has acted contrary to their express agreement. See for example: Partnership Act 1892 (NSW), s 5; Partnership Act 1891 (Qld), s 8; and Partnership Act 1958 (Vic), s 9. Partners can be liable jointly and severally. See for example: Partnership Act 1892 (NSW), s 12; Partnership Act 1891 (Qld), s 15; and Partnership Act 1958 (Vic), s 16.

Liability of partners in contract [9.120] Partners do not have limited liability (compare the position of members in a limited liability company. If the firm’s assets are insufficient, each partner is liable to the full extent of her or his personal assets for debts and other obligations incurred by a partnership. Each partner is liable jointly with all the other partners for debts incurred by the firm while he or she is a partner: s 13 (Vic). This means that every partner is responsible, not just for her or his share of the debt, but for the whole amount. A creditor has the choice either to sue the firm by name or to sue any one or more individual partner or partners. In the latter case, judgment will be enforced against the nominated partner(s) only, and it is up 482 [9.115]

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to her or him to obtain contribution from the other partners. If they are bankrupt or have disappeared, the unfortunate partner sued must satisfy the whole claim. Note: Because a partner’s liability in contract is joint, not joint and several (except in respect of the estate of a deceased partner), a plaintiff has only one opportunity to sue. If a creditor sues and obtains judgment against an individual partner(s) without also naming the firm as a defendant, this will bar any subsequent proceedings against other partners: see Kendall v Hamilton (1879) 4 App Cas 504.

Liability of partners in tort [9.130] In contrast, partners are jointly and severally liable in tort. Both the firm and all the partners will be bound by any tortious acts, provided the acts are committed by a partner(s): • “in the ordinary course of the business”; or • “with the authority” of the co-partners: s 14 (Vic). See Polkinghorne v Holland (1934) 51 CLR 143; National Commercial Banking Corp of Australia Ltd v Batty (1986) 160 CLR 251. If money or property of a third person is received: • by a partner acting within the scope of her or his apparent authority; or • by a firm in the course of its business; and • is misapplied by one or more of the partners, the firm will be liable to make good the loss: s 15 (Vic). Note: Because liability for tort is joint and several, a plaintiff has more than one opportunity to sue: s 16 (Vic). A plaintiff can bring separate actions against the firm and/or some or all of the partners.

Limited liability partnerships [9.135] Limited liability partnerships may be formed in New South Wales, Queensland, Tasmania, Victoria, South Australia and Western Australia. Unlike ordinary (“general”) partnerships, they must be registered and a registration fee is payable. In Victoria, for example, limited and incorporated limited partnerships must be registered with Consumer Affairs Victoria (CAV). Limited liability partnerships are similar to other partnerships but have two classes of partners. Active (general) partners run the business and are in the same position as partners in an ordinary partnership. Silent (limited) partners contribute capital to the partnership but, as long as they do not take any active part in running the business, they have the benefit of limited liability. Their liability is limited to the contribution they have made to the firm’s capital. This encourages investors to contribute capital. Limited partnerships were starting to become popular in the 1980s because of their ease of setting up, simpler documentation and ability to keep information confidential. However, since 1992 limited partnerships have been treated as companies for taxation purposes, which means that a limited [9.135] 483

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liability partner can no longer claim a tax deduction for partnership losses. Recent amendments to the Corporations Act have meant that all but the smallest limited partnerships must now comply with the fundraising provisions: see ASIC Policy Statement 41: Limited Partnership Fundraising. The combined effect of these changes has greatly reduced the popularity of limited partnerships.

Holding out a person as a partner [9.140] The doctrine of ostensible or apparent authority applies to partnerships as well as to companies: see Topic 12. Partners and people who hold themselves out as partners, or who consent or acquiesce to being held out, may be liable in contract or tort if: (a)

there is a representation that the person is a partner, either by that person or by someone else;

(b)

credit is given to the firm; and

(c)

that credit is given in reliance on that representation.

See s 18 (Vic); Martyn v Gray (1863) 14 CB (NS) 824; 143 ER 667; D & H Bunny Pty Ltd v Atkins [1961] VR 31. Holding out is often a problem in professional partnerships where a senior employee whose name appears on the firm’s letterhead may be assumed by a third party to be a partner, even though that person is actually only a salaried employee. Lynch v Stiff [9.150] Lynch v Stiff (1943) 68 CLR 428 (High Court of Australia) FACTS: Lynch was a “salaried partner” in a legal firm. This meant that although he was only an employee, his name appeared on the firm’s letterhead. Stiff had been a client of the firm for many years and Lynch had always handled his business. When Stiff sold some property he entrusted the proceeds to Williamson, who was a partner in the firm, to be invested. Williamson misappropriated the money. Stiff then sued Lynch on the basis that he had been held out by the firm as a partner. DECISION: The High Court agreed. The evidence indicated that Stiff invested the money through the firm because he believed, on the basis of the letterhead, that “Lynch, whom he trusted, was a partner”: at 435. Stiff had relied on this representation.

Relationship between partners [9.160] A fundamental principle of partnership law is that a partnership is a fiduciary relationship based on mutual trust and confidence between partners: see Birtchnell v Equity Trustees, Executors & Agency Co Ltd (1929) 42 CLR 384; Chan v Zacharia (1984) 154 CLR 178 and recently Wright Prospecting Pty Ltd v 484 [9.140]

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Hancock Prospecting Pty Ltd (No 9) [2010] WASC 44. As fiduciaries, partners have mutual rights and duties which generally require them to act in good faith and for the common good of the partnership. Compare the similar fiduciary duties which require directors to act in good faith and in the best interests of the company which are discussed in Topic 13. Partners may modify these rights and duties in any way they wish in the partnership agreement: s 23 (Vic). More specifically, unless permitted by the terms of the partnership agreement, partners: (1)

must not use their position or any information gained as a result of that position for their personal profit;

(2)

must not put themselves in a situation where there will be any conflict between their duty as partners and their personal interest;

(3)

must fully disclose all matters likely to affect the partnership to the other partner(s) (s 32 (Vic); and see Law v Law [1905] 1 Ch 140); must account for any private profits made without the consent of the other partners as a consequence of any of the above (s 33 (Vic)); and must not compete with the firm: s 34 (Vic).

(4) (5)

Subject to any express or implied agreement to the contrary, the following basic statutory rules govern the rights and duties of partners: (a)

(b) (c) (d) (e)

all partners have a right to share equally in the capital and profits of the business and must contribute equally towards any losses (s 28(1) (Vic)) (Note this may not be what the partners want and so the partnership agreement will be drafted to address this); partners are entitled to be indemnified for payments and liabilities made or incurred in conducting the firm’s business (s 28(2) (Vic)); partners are entitled to interest on any money lent to the firm, but not to interest on their capital contribution (s 28(3), (4) (Vic)); every partner has a right to take part in the management of the firm’s business (s 28(5) (Vic)); no partner is entitled to be paid for acting in the firm’s business (s 28(6) (Vic));

(f)

a new partner cannot be introduced without the consent of all other partners (s 28(7) (Vic)); and

(g)

differences of opinion are to be decided by a majority of partners, but all partners must consent to any change in the nature of the business: s 28(8) (Vic).

A partner may assign her or his share in the partnership without the consent of the other partners, but the assignee will only be entitled to the assignor’s share in the profits and has no right to interfere in the management of the business: s 35 (Vic). A partner cannot be expelled from the partnership unless the partnership agreement expressly gives this power to a majority of partners: s 29 (Vic). [9.160] 485

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Partnership property [9.170] Ownership of partnership property is one aspect of the partnership relationship that is specifically governed by the Partnership Acts: for example, ss 24 – 26 (Vic). The basic rule is that all property that was originally brought into a partnership, or is acquired by it later, is partnership property: s 24 (Vic). In the absence of any contrary intention, any property that is bought with partnership money will be deemed to have been bought for the partnership: s 25 (Vic). It is very important to distinguish between property that is partnership property and property that is being used in the business, but that remains the personal property of individual partners: see Robinson v Ashton (1875) LR 20 Eq 25; Kelly v Kelly (1990) 64 ALJR 234. Harvey v Harvey [9.180] Harvey v Harvey (1970) 120 CLR 529 (High Court of Australia) FACTS: Harold Harvey was unable to run his pastoral property, Fonthill, himself because of illness. He agreed with his brother Horace that they would enter into a partnership. Under the agreement, Harold would provide the land, stock and machinery and Horace and his sons would provide the skill and labour. This arrangement would give Horace’s sons experience in running a property and would keep Fonthill operating until Harold’s young son was old enough to take it over. When the partnership was eventually dissolved there was a dispute as to whether Fonthill remained Harold’s personal property or had become partnership property. DECISION: The High Court held that Fonthill remained Harold’s personal property. The evidence showed that Harold had never intended it to become partnership property. The partnership had only been formed to keep Fonthill going until Harold’s son was old enough to run it himself.

Liability of incoming and outgoing partners [9.190] Each time the composition of a firm changes because a partner retires or dies or a new partner is admitted, a new partnership relationship is created. Subject to any agreement to the contrary (including a written partnership agreement), an outgoing partner will still be liable for all debts and obligations incurred while he or she was a partner, and an incoming partner will only be liable for debts incurred after joining the firm: s 21 (Vic). This section allows a retiring partner to discharge her or his liabilities by obtaining a release from the continuing partners and the firm’s creditors: s 21(3) (Vic). It is important for retiring partners to ensure that this is done, and that notice of any change in the firm’s composition is given to all creditors and clients. Until notice is given, a person is entitled to treat all apparent members of the firm as partners: s 40 (Vic). For example, existing clients of a firm are entitled to assume that all the people listed as partners on a firm’s letterhead are partners in the firm unless

486 [9.170]

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they have actual notice to the contrary: Hamerhaven Pty Ltd v Ogge [1996] 2 VR 488. What constitutes notice to new clients is set out in the Partnership Acts (eg, s 40(2) (Vic)).

Termination and dissolution [9.200] A partnership is a contractual relationship so, unless the partnership agreement provides otherwise, a partnership will be automatically dissolved if a partner retires, dies or becomes bankrupt: s 37 (Vic). To address this, almost all partnership agreements make provision for the orderly restructure of a firm in these circumstances without requiring it to be formally dissolved and the business wound up. Any partnership which is, or which becomes, illegal – for example, because the number of partners exceeds the maximum allowed, will be dissolved by operation of law: s 38 (Vic); and see Hudgell Yeates & Co v Watson [1978] QB 451. A partnership which is entered into for a fixed term or to carry out a single undertaking will be dissolved automatically at the end of that period or undertaking unless the partners agree otherwise: s 36(a) – (b) (Vic). If a partnership is entered into for an indefinite term, any partner may dissolve it by giving notice to the other partners: s 36(c) (Vic). A partnership may also be dissolved by a court order on the application of one or more partners: s 39 (Vic). The grounds for making such an order are: (a)

lack of capacity due to mental illness;

(b)

permanent incapacity;

(c)

conduct which prejudicially affects the firm’s business;

(d)

wilful or persistent breach of the partnership agreement;

(e)

the business can only be carried on at a loss; and

(f)

it is just and equitable to dissolve the partnership.

See Jenkins v Bennett [1965] WAR 42.

Consequences of dissolution [9.210] Dissolution of a firm ends the partnership relationship between the partners, but the business itself remains. Public notice of the dissolution of a firm (or the retirement of a partner) must be given: s 41 (Vic). The business of the firm may be taken over by one or more of the former partners who buy out the others, or it may be wound up. If the business is continued by some of the former partners without a final settlement of accounts, subject to any contrary agreement the outgoing partner(s) will be entitled to either a share of profits made after the dissolution or to interest on their share in the partnership: s 46 (Vic); and see Pathirana v Pathirana [1967] 1 AC 233; Fry v Oddy [1998] VSCA 26. If the business is to be wound up, the winding up may be carried out by the former partners (s 43 (Vic)) or if necessary, by a receiver appointed by the court. [9.210] 487

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To enable the business to be wound up in an orderly manner, the rights and obligations of the former partners continue after dissolution as far as is necessary to wind up the affairs of the partnership and to complete any transactions which were in progress at the time the firm was dissolved: s 42 (Vic). If the former partners are unable to agree, any partner may apply to the court for the appointment of a receiver. Once the business has been wound up and the firm’s assets have been realised, its debts and liabilities are paid and any surplus assets distributed according to the terms of the partnership agreement. In the absence of agreement, the following priority rules are to be followed in distributing assets: • debts and other external liabilities – which are paid first out of profits, next out of capital and then if necessary, by the individual partners in the same proportion as they shared profits; • repayment of advances (not capital) to partners; • repayment of capital to partners; and finally, • any remaining assets are shared in the same proportion as the partners had shared profits. If the money runs out at any stage the partners share what there is rateably (in the same proportion as they had shared profits): s 48 (Vic).

Trust [9.220] In its simplest form, a trust exists when one party (the trustee) is required to hold or invest property on behalf of another (the beneficiary). One fundamental difference between a company and a trust is that a trust is not a separate legal entity. While the trustee and the beneficiaries are separate legal persons, the “trust” itself is not a separate legal person. Hence, a trust, unlike a corporation, cannot sue or be sued as a separate entity. The “trust” itself cannot incur debts and liabilities – the trustee is personally liable. For this reason, the trustee is often a company. However, in the controversial majority decision of Hanel v O’Neill (2003) 180 FLR 360 the majority of the Full Supreme Court of South Australia held that the corporate veil may be pierced under s 197(1) of the Corporations Act making the directors of a company that is a trustee liable for the liabilities of the trustee if there are insufficient trust assets. Generally, a trustee will be protected by an indemnity from the trust fund, but only for liabilities properly incurred in the administration of the trust. The terms of the trust deed will usually exclude any right to claim an indemnity for any shortfall in the trust assets from the beneficiaries. For taxation purposes, a trust is not recognised as a separate entity. Tax is either payable in the hands of the beneficiaries or, if income is not distributed in any year, the trustee is personally liable for tax at penalty rates. Aside from public unit trusts (which fall within the definition of managed investment schemes), a trust does not require any formality, although sometimes evidence in writing is required. There are no ongoing public filing requirements. 488 [9.220]

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There are no limits to the number of beneficiaries and the death of a beneficiary does not affect the existence of the trust. However, a trust cannot continue indefinitely. A trust can only exist for the duration of the life of a nominated person plus 21 years (this is a general law rule known as “the rule against perpetuities”). In some States an alternative period of 80 years applies.

Incorporated and unincorporated associations Definition [9.230] A not-for-profit (or non-profit) association is a group of two or more people who have agreed to join together to pursue a common lawful purpose of some kind.

Not-for-profit vs partnership [9.240] It is important to distinguish a not-for-profit association from a partnership. Both are associations, the members of which agree to be bound by mutual rights and duties, but a partnership is a business association. It is a relationship between people carrying on business in common with a view to profit. In contrast, a not-for-profit association is not formed for the purpose of trading or carrying on business, and any profits which may result from its activities must be used for the purposes of the association. A not-for-profit association is not forbidden to make a profit as an incidental result of its activities, but if it does, any distribution of that profit or of the association’s property to the members is prohibited. Section 115 of the Corporations Act 2001 (Cth), which limits a partnership to a maximum of 20 members, does not apply to a not-for-profit association because the members of a not-for-profit association are not in partnership. Table 9.1: Comparative table Partnership Relationship between people who carry on business in common Carried on with a view to profit Profits divided among the partners

Not-For-Profit Association Relationship between people associated together for a non-business purpose Carried on for not-for-profit purposes Any distribution of profit to members prohibited

[9.250] A not-for-profit association may be formed for any kind of lawful purpose which does not primarily involve trading or carrying on business. Not-for-profit associations include groups such as: (a)

social and sporting clubs;

(b)

artistic and learned societies;

(c)

trade and professional associations;

(d)

educational, religious or charitable organisations; and

(e)

associations formed to promote cultural, environmental or other purposes intended to benefit the community. [9.250] 489

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Like business associations, not-for-profit associations may be unincorporated (compare partnerships) or incorporated (compare companies – see below). A not-for-profit association may incorporate by registration under the applicable State or Territory Act (“Associations Incorporation Acts”), or as a company limited by guarantee under the Corporations Act 2001 (Cth). Some not-for-profit associations are incorporated by Royal Charter or by a special statute. An unincorporated association has certain advantages. No formalities are involved in its formation or the conduct of its affairs. Its members are free to agree to whatever structure or rules they wish and can conduct the association’s affairs in complete privacy. However, for all but the smallest associations, these advantages are almost always outweighed by the wellknown difficulties inherent in an unincorporated association’s lack of legal status, some of which are summarised at [9.280]. The association can choose to have a set of rules or constitution.

Unincorporated not-for-profit association [9.270] The simplest form of unincorporated organisation is a “not-for-profit” association such as a social or sporting club which is formed on the basis that any profits made by the association are used solely for the purposes for which the association was formed and any distribution of profits to the members is prohibited. Since there is no intention to share profits among the members, the association is not a partnership and does not have to register as an “outsize partnership” under s 115 of the Corporations Act 2001 (Cth) if the association or club has more than 20 members. These associations are not regarded as separate entities for legal purposes. Its property belongs to its members and so will be owned by different people from time to time as the membership changes: see Williams v Hursey (1959) 103 CLR 30 at 54 per Fullagar J.

Limitations of not-for-profit associations [9.280] An unincorporated not-for-profit association cannot: (a)

buy or own property;

(b)

enter into a contract or be liable in tort;

(c)

sue or be sued; or

(d)

receive a gift, be the beneficiary of a trust or be left property by will.

It can only act through its members. It is possible to get around at least some of these difficulties by using trustees or individual members, usually committee members, to act on behalf of the general body of members. Trustees may be appointed to hold the legal title to association property and committee members may act as representatives of the other members in dealings with outsiders. However, there are many well-known cases illustrating the problems which may arise when an unincorporated association purports to enter a contract or incurs liability in tort: see Carlton Cricket & Football Social Club v Joseph [1970] VR 487; and Smith 490 [9.270]

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v Yarnold [1969] 2 NSWR 410. These difficulties are made more acute for committee members because, unless the rules of an unincorporated association state otherwise, the liability of the members of unincorporated association is limited to the amount of their subscription: Wise v Perpetual Trustee Co Ltd [1903] AC 139.

Lawsuits [9.290] Many modern courts have adopted a pragmatic approach to disputes in contract and tort involving unincorporated associations and outsiders. Where possible the committee members, as the persons mainly responsible for the operations of an association, have been held personally liable in contract (and in some cases also in tort) for the actions of the association: see Bradley Egg Farm Ltd v Clifford [1943] 2 All ER 378; Smith v Yarnold [1969] 2 NSWR 410, but contrast Carlton Cricket & Football Social Club v Joseph [1970] VR 487. It is not clear whether the committee members would have a right to be indemnified out of an association’s funds against these liabilities, unless this was specifically provided for in the rules: see Peckham v Moore [1975] 1 NSWLR 353 (in dicta). This gives committee members a strong incentive to encourage the members to incorporate the association.

Members' rights [9.300] Many difficult issues arise in the context of disputes concerning the rights of members of an unincorporated association. Courts have traditionally been extremely reluctant to intervene in the internal affairs of an association, except in circumstances involving members’ proprietary rights or where an association’s rules were intended to create a legally enforceable contract: Cameron v Hogan (1934) 51 CLR 358. Unless a member’s trade, profession or livelihood was at stake, as in the case of a professional or semi-professional sportsperson, courts have usually refused and may still refuse to accept jurisdiction to hear internal disputes. However, some judges have adopted a more liberal approach: see Nagle v Feilden [1966] 2 QB 633.

Dissolution [9.310] Many unincorporated associations are only active for a short period and rapidly become defunct if the original purposes of the association are no longer relevant, or if members lose interest in the association’s purposes or activities. When this happens, an association may no longer have any members, but its bank account or other property may still exist. In these circumstances it may be difficult or even impossible to wind up the affairs of the association and distribute its property in an orderly and appropriate manner without the intervention of the court: see Master Grocers’ Association of Victoria v Northern District Grocers Co-operative Ltd [1983] 1 VR 195. Alternatively it is possible that the unincorporated association had a set of rules or constitution that expressly mentioned the formalities of dissolution and in that event these would be followed. [9.310] 491

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Conclusion [9.320] These serious disadvantages make it clear that once an association is well established and it appears that it will remain in existence for a considerable time, in most circumstances it is probably sensible for the members to consider incorporation.

Unincorporated joint venture [9.330] There is often a fine line between an unincorporated joint venture and a partnership. “Joint venture” is not a technical term with a single legally defined meaning. Traditionally, if several people agreed to work together on a single project rather than on a continuing basis, this was likely to be considered to be a joint venture rather than a partnership. However, this distinction is no longer always valid and a “joint venture” may often be a partnership: see United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1 and iWave Pty Ltd v Break O’Day Business Enterprise Board Inc [2004] TASSC 43. Unincorporated joint ventures are frequently used in the mining and petroleum industry for taxation and liability reasons. A typical example would be where a promising mineral deposit has been found and two or more companies agree to develop the mine together and to share the ore extracted from it. Each company would then use its own separate facilities to refine and sell the minerals and make separate profits. The parties in a joint venture generate a product which is shared between them, in contrast to partners who carry on business in common and share profits.

Conclusion [9.340] The non-corporate forms of association discussed in this topic which include sole trader, partnerships and trusts do not create a “separate legal entity” – that is, an entity recognised by law as being separate and distinct from the individual(s) who formed it or who manage it. This is to be contrasted with a corporation, which is a separate legal entity from its members, external stakeholders and company officers. [9.350] Table 9.2: Non-corporate and corporate forms Separate entity Type of liability

492 [9.320]

Sole trader no

Partnership no

Trust no

Incorp assoc yes

Company yes

unlimited

liable for acts of fellow partners (unless limited partnership)

trustee personally liable with right of indemnity from trust fund

limited to membership fee

may be limited (eg, company limited by shares) or unlimited

Business Organisations

Sole trader Transferabil- difficult – would need ity of new contracts interest with creditors

Partnership requires all partners to consent; retiring partners continue to be liable unless creditors consent – capital – capital contributed by contributed by sole trader or partners or loans– cannot by loan– give a cannot grant circulating circulating security security interest– interest– cannot raise cannot raise funds from funds from the public the public

Trust beneficiary may assign their interest

Incorp assoc good – continuity not affected by changes to members

– capital contributed by members’ annual sub-scription and fundraising– possible for association to issue circulating security interest# as security– cannot raise funds from public – one owner Size, – no limit to – generally – are beneficiaries– minimum size limited to 20 duration and but can employ limited to life limits in some (s 115)– no formation others– no +21 years or states (eg 5 formality to formality to 80 years– members in establish: can establish generally no NSW, Vic, have verbal ACT, NT)– p/s agreement formality except public formation trusts requires registration no public no public no public – varies, but Ongoing disclosure or disclosure or disclosure or larger disclosure filing required filing required filing required associations requireare required to ments have audited accounts and lodge annual returns– must lodge notice of certain changes with Registrar

Finance

Taxation

personal rate applies

– personal rate applies– ltd liability p/s taxed as company

– capital comes from gift by settlor– trust deed may limit ability to deal with trust assets– managed trusts can raise funds from the public

– tax paid by beneficiaries or by trustee (penalty rate)

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Company good – continuity not affected by changes to members – ASX listing possible – capital contributed by members or by loans to company– possible for company to issue circulating security interest# as security– company can raise funds from public

– Pty Ltd limit 50 nonemployee shareholders– public company no limit– formation requires registration – depends on type of company (eg, small pty ltd not required to lodge audited accounts)– all companies must notify ASIC of certain changes and check annual statements – treated as – company company ie, rate applies– company rate Australian applies shareholders however many imputation associations credits exempt

[9.350] 493

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Sole trader Management absolute and control

Partnership unless limited partnership, have right to take part in management

Trust – vested in trustee– generally, beneficiaries cannot interfere

Incorp assoc – committee has powers set out in association’s rules– generally, members cannot interfere

Company – directors have powers set out in internal rules and general law– generally, members cannot interfere # Circulating security interests: for incorporated associations see eg Associations Incorporation Act 1981 (Vic) s 16; for companies see Corporations Act, s 124(1)(f). Subject to some exceptions, the requirement to obtain an ABN and possible need to register for GST will apply to all non-corporate and corporate forms.

Corporate forms of association [9.360] The law recognises two types of “entities”: • natural persons – that is, you; and • artificial legal entities – that is, corporations. Each type of artificial legal entity (corporation) is brought into existence by a different method. A “company” registered under the Corporations Act is only one type of corporation: see definitions in ss 9 and 57A. The Corporations Act 2001 (Cth) does not cover all corporations. The other types of corporations are described briefly below.

Corporations formed by Royal Charter [9.370] This type of corporation gains its status from the Crown. Traditionally, people wishing to form such a corporation petitioned the monarch. Institutions such as the Institute of Chartered Accountants and the Royal College of Surgeons were formed this way. In Australia, this method of incorporation is no longer available.

Corporations sole [9.380] This concept originated in early English law as a device that enabled the successors to a particular office or position in the church to constitute an artificial legal entity/person in whom title to church property could vest. The concept still exists today, for example, the Public Trustee or State Trustee is a corporation sole.

Corporations formed by special statute [9.390] Statutory corporations and many educational institutions are formed by Parliament passing a special statute to set them up, for example, The University of Melbourne.

Corporations formed by registration [9.400] These corporations come into existence as separate legal entities by registration under a specific Act. Examples are: 494 [9.360]

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• co-operatives; • incorporated associations; • trade unions; and • companies. [9.410] Figure 9.1: Summary – types of artificial legal entities

Incorporated associations [9.420] Many not-for-profit organisations obtain the benefits of incorporation by registering under the associations incorporation legislation that is in force in each State and Territory: see, for example, Associations Incorporation Act 2009 (NSW), Associations Incorporation Act 1981 (Qld), and Associations Incorporation Reform Act 2012 (Vic). This legislation is specifically designed for not-for-profit associations and, although it is not uniform, in most cases it provides a simpler and more affordable method of incorporation compared with the Corporations Act 2001 (Cth). Alternatively, some larger and/or national not-for-profit organisations choose, or are required, to register as companies limited by guarantee under the Corporations Act 2001 (Cth). The members of an incorporated association are protected from any personal liability: See for example, Associations Incorporation Reform Act 2012 (Vic), s 15(1). The association may hold its assets and enter into contracts in the name under which it is registered, s 29 Associations Incorporation Reform Act 2012 (Vic). Other not-for-profit associations are incorporated by Royal Charter or special statute. Subject to some limited exceptions, an incorporated association must not be formed for trading or profit-making purposes. If an incorporated association makes monetary profits as a result of its activities, these profits must be used for the association’s purposes and must not be divided among the members: see, for example, Associations Incorporation Reform Act 2012 (Vic), s 33. [9.420] 495

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Incorporation procedure Incorporation of association In most jurisdictions the procedure for incorporation is reasonably straightforward. The steps required are: (a)

the members of a not-for-profit association authorise a person to lodge an application for registration: for example - Associations Incorporation Reform Act 2012 (Vic), s 5;

(b)

The association must have a written set of rules, also known as a constitution. For example the rules in Victoria must deal with the 23 matters set out in Schedule 1 to the Associations Incorporation Reform Act 2012 (Vic): s 47;

(c)

The members approve a statement of purposes and rules – unless for example in Victoria members agree to adopt the Model Rules provided in the Associations Incorporation Regulations 2009 (Vic): s 6 (Vic); the members choose a name which complies with the relevant Associations Incorporation Acts in each jurisdiction. For example, in Victoria under s 22 of the Associations Incorporation Reform Act 2012 (Vic), the suffix “Incorporated” or “Inc” must be used to indicate the status of the association although in Queensland an exemption can be granted; and

(d)

(e)

the application is lodged together with a copy of the statement of purposes (if required) and rules (if any): For example, s 6 Associations Incorporation Reform Act 2012 (Vic).

The Registrar has power to refuse to register an association if the association is carried on for the purpose of securing pecuniary profit for its members; or the registration of the name of the proposed incorporated association is prohibited, for example, s 22 of the Associations Incorporation Reform Act 2012 (Vic); or the rules of the proposed incorporated association do not comply with the requirements, for example ss 7(3) and 47 of the Associations Incorporation Reform Act 2012 (Vic).

Registration of existing bodies [9.435] In Victoria, registration of existing bodies as incorporated associations is available. A company limited by guarantee, a co-operative, society, association, institution or body formed, incorporated or registered under the Co-operatives Act 1996 (Vic) or any Act relating to the incorporation, formation or registration of co-operatives, societies, associations, institutions or bodies (but not a trade union registered under the Trade Unions Act 1958 (Vic) may be eligible to apply for incorporation under the Associations Incorporation Reform Act 2012 (Vic) in certain circumstances as set out in s 11:

496 [9.435]

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ASSOCIATIONS INCORPORATION REFORM SECTION 11 Eligibility to apply to be registered under this Act (1)

ACT

2012

(Vic)

–

A registrable body is eligible to apply for incorporation under this Act if– (a)

The body has: (i)

in the case of a company–passed a special resolution, within the meaning of the Corporations Act, approving the application; or

(ii)

in any other case–resolved in accordance with its rules that the application be made; and

(b)

the purposes of the body (if any) are purposes for which an incorporated association may lawfully be carried on; and

(c)

the body has rules that–

(d)

(i)

comply with; or

(ii)

will, on the incorporation of the body under this Act, comply with–

the requirements under section 47 applying to the rules of an incorporated association; and the body has nominated a person who is at least 18 years of age and is resident in Australia to be the first secretary of the proposed incorporated association.

Consequences of incorporation [9.440] Once a certificate of incorporation is granted, an incorporated association is a body corporate and so is a separate legal entity. This means that, like a company, its existence continues until it is wound up, regardless of changes to its membership, and it can acquire and own property, enter into contracts and sue or be sued in the name of the association: See s 29(2) Associations Incorporation Reform Act 2012 (Vic). Any property which was previously owned by or on behalf of an unincorporated association vests automatically in the incorporated association on registration: See s 9 Associations Incorporation Reform Act 2012 (Vic). An incorporated association may have a common seal: see s 23 of the Associations Incorporation Reform Act 2012 (Vic). Normally, the members of an incorporated association have limited liability and have no right or interest in the association’s property: see s 52 of the Associations Incorporation Reform Act 2012 (Vic). [9.440] 497

Business and Corporate Law

Constitution and management [9.450] In Victoria, an association must have a written set of rules, or a constitution, which deal with the 23 matters set out in Schedule 1 to the Associations Incorporation Reform Act 2012 (Vic). A statement of purposes (broadly equivalent to the former “memorandum of association” for a company (see Topic 10)) is also required which sets out the objects and purposes of the association. In most jurisdictions including Victoria, an association may adopt its own rules or may choose to rely wholly or partly on the Model Rules. In Victoria these are set out in the Associations Incorporation Regulations 2009 (Vic) and Associations Incorporation Reform Act 2012 (Vic). The Model Rules operate as default rules and, like replaceable rules for companies apply automatically unless excluded: for example, s 49 of the Associations Incorporation Reform Act 2012 (Vic). If an association adopts its own rules these must provide for the matters listed in Schedule 1 to the Associations Incorporation Reform Act 2012 (Vic). These include: The Association • The name of the incorporated association. • The purposes of the incorporated association. Membership • The qualifications (if any) for membership of the incorporated association. • The entrance fees, subscriptions and other amounts (if any) to be paid by members of the incorporated association. • The rights, obligations and liabilities of members. • Provisions for the resignation of a member or cessation of membership. • The procedure (if any) for the disciplining of members and the mechanism (if any) for appearances by members in respect of disciplinary action taken against them. • The grievance procedures for settling disputes under the rules between the incorporated association and any of its members or between a member and any other member. Management and record keeping • The name, membership and powers of the committee or other body having the management of the incorporated association (in this paragraph referred to as the committee) and– (a)

the election or appointment of members of the committee;

(b)

the terms of office of members of the committee;

(c)

the grounds on which, or reasons for which, the office of a member of the committee becomes vacant;

(d)

the filling of casual vacancies occurring within the committee;

498 [9.450]

Business Organisations

(e)

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the quorum and procedure at meetings of the committee.

• The procedures for the appointment and removal of the secretary of the incorporated association. • The custody of records, securities and other relevant documents of the incorporated association. • Provisions for the custody and use of the common seal (if any) of the incorporated association. • Provision for members to have access to, and to be able to obtain copies of, the records, securities and other relevant documents of the incorporated association. • The preparation and retention of accurate minutes of– (a)

general meetings of the incorporated association; and

(b)

meetings of the committee or other body having the management of the incorporated association.

• Provision for members to have access to, and to be able to obtain copies of, minutes of general meetings of the incorporated association, including financial statements submitted at a general meeting. • Right of access (if any) by members to minutes of meetings of the committee, including any terms and conditions subject to which access may be granted. Meetings • The intervals between general meetings of members of the incorporated association and the manner of calling general meetings. • The quorum and procedure at general meetings and whether members are entitled to vote by proxy at general meetings. • The time within which, and the manner in which, notices of general meetings and notices of motion must be given, published or circulated. Funds • The sources from which the funds of the incorporated association are to be or may be derived. • The manner in which the funds of the incorporated association must be managed and, in particular, the mode of drawing and signing cheques on behalf of the incorporated association. Alteration of rules • The manner of altering and rescinding the rules of the incorporated association and of making additional rules. Winding up and dissolution • The disposition of any surplus assets on the winding up or dissolution of the incorporated association. [9.450] 499

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The members may amend the statement of purposes or rules by passing a special resolution (except in the Northern Territory), for example as provided under ss 50 and 64 of the Associations Incorporation Reform Act 2012 (Vic). The committee members of an incorporated association are in an analogous position to the directors of a company. They are subject to similar general law and, in some jurisdictions, statutory obligations: see generally Topic 13. The statutory duties focus on the area of conflict of interest and attempt to require committee members to comply with higher standards of disclosure: see, for example, ss 82 – 87 of the Associations Incorporation Reform Act 2012 (Vic).

Public officer [9.460] Except in Western Australia, all incorporated associations must appoint a person called a public officer (“secretary” in Queensland and Victoria): see ss 72 – 78 of the Associations Incorporation Reform Act 2012 (Vic). A public officer or secretary must be a resident of the jurisdiction. The public officer or secretary of an association is the point of contact between the association, the government and the community generally and is responsible for ensuring that the association complies with any ongoing regulatory requirements. Notice of the appointment and of any changes to the public officer or secretary must be lodged. In Victoria, New South Wales and Queensland an incorporated association must also have a registered address or registered office: see, for example, s 28 of the Associations Incorporation Reform Act 2012 (Vic).

Continuing regulatory requirements [9.470] The regulatory regime under most of the Associations Incorporation Acts is similar in many ways to the Corporations Act 2001 (Cth) but the requirements are generally much less onerous. An incorporated association must: 1. 2.

3.

lodge details of any changes to its name (see, for example, s 24 of the Associations Incorporation Reform Act 2012 (Vic)); comply with basic standards requiring it to keep adequate and accurate accounts and financial records (see, for example, s 89 of the Associations Incorporation Reform Act 2012 (Vic)); and lodge financial returns as required by the Associations Incorporation Acts (see, for example, s 102 of the Associations Incorporation Reform Act 2012 (Vic)).

The individual requirements vary, but as a general rule all incorporated associations must hold an annual general meeting at regular intervals as required by the Associations Incorporation Acts: see, for example, s 63 of the Associations Incorporation Reform Act 2012 (Vic). Audit requirements vary considerably. A tiered system applies in the Australian Capital Territory, the Northern Territory, South Australia, Queensland, New South Wales and Victoria. 500 [9.460]

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The Tiered System in Victoria [9.475] Under the Associations Incorporation Reform Act 2012 (Vic) an association falls within one of three tiers according to its total revenue: Tier 1 – less than $250,000, s 90(2) of the Associations Incorporation Reform Act 2012 (Vic). Tier 2 – $250,000 to $1 million, s 90(3) of the Associations Incorporation Reform Act 2012 (Vic). Tier 3 – more than $1 million, s 90(4) of the Associations Incorporation Reform Act 2012 (Vic).

Total revenue refers to the association’s total income from all its activities during its financial year, before deducting any expenses including the cost of goods that it sold, ss 90(5) and (6) of the Associations Incorporation Reform Act 2012 (Vic).

Reporting and audit obligations [9.477] In Victoria, Tier 1 associations must submit the financial statements at the first annual general meeting for that financial year. See, for example, s 92 of the Associations Incorporation Reform Act 2012 (Vic). Tier 1 associations do not need to have their financial statements externally reviewed or audited unless: • their rules state otherwise (audit or review); • a majority of members vote to do so at a general meeting (review only), or • the Registrar of Incorporated Associations directs them to do so. See s 93 of the Associations Incorporation Reform Act 2012 (Vic). Associations that fall under Tier 2 and 3 must be prepare financial statements in accordance with the Australian Accounting Standards issued by the Australian Accounting Standards Board. See ss 95 and 98 of the Associations Incorporation Reform Act 2012 (Vic). For Tier 2 associations, financial statements must be reviewed by an independent accountant, in accordance with Auditing Standards on Review Engagements; ss 95 and 96 of the Associations Incorporation Reform Act 2012 (Vic). Where the rules of the Association require that the accounts are audited then that auditor’s report may be submitted, together with the financial statements, to members at the AGM and there is no need to have the accounts reviewed by an independent accountant. For Tier 3 associations, the financial statements must be prepared and audited by an independent auditor in accordance with the Australian Auditing Standards; ss 98 and 99 of the Associations Incorporation Reform Act 2012 (Vic). The Registrar, or any other official responsible for the administration of the Associations Incorporation Acts in each jurisdiction, has wide powers of inspection similar to those of ASIC under the Corporations Act 2001 (Cth): see, for example, Pt 13 of the Associations Incorporation Reform Act 2012 (Vic). The Associations Incorporation Acts provide specific penalties for breaches of particular sections and include general offence and penalty provisions: see, [9.477] 501

Business and Corporate Law

for example, Pt 14 of the Associations Incorporation Reform Act 2012 (Vic). These are intended primarily to protect the general public against any abuse by an incorporated association of its not-for-profit status, and to ensure compliance with the regulatory scheme. If an association breaches the prohibition against trading or if its members derive any pecuniary profits as a result of its activities, the association’s registration may be cancelled, and the members will be subject to financial penalties and may lose the protection of limited liability: see, for example, s 52 of the Associations Incorporation Reform Act 2012 (Vic).

Restructuring incorporated associations [9.480] It is possible in some jurisdictions for an incorporated association (or a not-for-profit association which is eligible to be incorporated as an association) to be restructured, either voluntarily or at the direction of the Registrar, without the need for the association to be formally wound up: see for example, Associations Incorporation Act 1985 (SA), s 40B.

Transfer of incorporation Voluntary transfer to or from the associations incorporation regime [9.490] A not-for-profit association which is incorporated under another statutory regime such as the Corporations Act 2001 (Cth) may apply to transfer its registration or “migrate” to one of the Associations Incorporation Acts without first having to wind up the association and reincorporate: see, for example, ss 10 – 15 of the Associations Incorporation Reform Act 2012 (Vic). Conversely, an incorporated association may resolve by special resolution to migrate to another statutory regime if, for example, it had become a national organisation and registration as a company limited by guarantee was more appropriate: see, for example, ss 109 – 115 of the Associations Incorporation Reform Act 2012 (Vic).

Directed transfer from the associations incorporation regime [9.500] In circumstances where an incorporated association has in effect “outgrown” the regime, the Registrar may direct it to transfer its registration to another statutory regime on the grounds that its continued incorporation as an association would be inappropriate or inconvenient because of: (a)

the scale of nature of its activities;

(b)

the value or nature of its property;

(c)

the extent or nature of its dealing with the public; or

(d)

any other prescribed reason: see, for example, Associations Incorporation Reform Act 2012 (Vic), s 111(4).

The existence of this power reflects public concern that large not-for-profit organisations should be required to be registered under the as companies 502 [9.480]

Business Organisations

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limited by guarantee and subject to the rules regulating public companies, rather than under the less stringent regulatory regime imposed by the Associations Incorporation Acts.

Members' rights [9.510] The courts have traditionally been very reluctant to intervene in the internal affairs of any associations, regardless of whether an association was incorporated or not. The exceptions were: 1.

2.

where the members had a proprietary right or interest in an association’s property – members of an incorporated association do not have such rights (see, for example, s 9 of the Associations Incorporation Reform Act 2012 (Vic)); or where a member’s trade, profession or livelihood was involved, as with trade or professional associations or professional or semi-professional sporting bodies.

In any other circumstances it was very difficult to convince a court to accept jurisdiction in any disputes concerning members’ rights: Cameron v Hogan (1934) 51 CLR 358. Several of the Associations Incorporation Acts now provide that, like the constitution of a company (see Topic 10), the rules of an incorporated association take effect as a contract between an association and its members and between individual members: see, for example, Associations Incorporation Reform Act 2012 (Vic), s 46. On its face a provision of this kind would appear to make it clear that the rules are intended to create a legally enforceable relationship between the members. In Victoria (and in some other jurisdictions) the members also have a statutory right to go to the court for an order which: • directs that the rules be observed: s 67(1) Associations Incorporation Reform Act 2012 (Vic); or • declares and enforces the rights or obligations of the members amongst themselves, or of the members and the association: s 67(2) Associations Incorporation Reform Act 2012 (Vic). This right does not depend on the members having a proprietary or any other right or interest in the association’s property: s 67(3) Associations Incorporation Reform Act 2012 (Vic). However, the little authority that exists as to the effect of these and similar provisions in other jurisdictions indicates that the existence of these provisions has had little effect on the traditional judicial reluctance to intervene in the internal affairs of associations: see Re Maggacis [1994] 1 Qd R 59. In Victoria, the rules of all incorporated associations are required to include a grievance procedure for dealing with disputes. A procedure of this kind, which must be in accordance with the principles of natural justice, provides an [9.510] 503

Business and Corporate Law

alternative means for dealing with disputes arising under the rules of an association: Associations Incorporation Reform Act 2012 (Vic), s 55. Under the general law, an association could only expel or take any other disciplinary action against a member if its rules included power to do so. Any such action must: • comply strictly with the procedure set out in the rules; and • be carried out in accordance with the principles of natural justice.

Cancellation of incorporation, winding up and distribution of surplus assets [9.520] Many not-for-profit associations are formed to pursue purposes that are popular for a period of time but gradually become irrelevant. When this occurs an association often becomes inactive and its membership dwindles to a point where it is difficult to ascertain the identity of the members, or even whether any members still exist. The statutes include several procedures designed to provide an orderly method of dealing with this kind of situation. Furthermore, the rules of an association may contemplate this situation.

Cancellation of incorporation [9.530] Most Associations Incorporation Acts include an administrative power to initiate a procedure leading to the cancellation of the registration of an incorporated association that appears to be defunct. This is an effective sanction which can be used to ensure that associations which have in practice ceased to exist are removed from the register: see, for example, Associations Incorporation Reform Act 2012 (Vic), Pt 9.

Winding up and Cancellation [9.540] An incorporated association is a body corporate and the grounds and procedures for winding it up are broadly similar to those which apply when a company is wound up: see Topic 19. An incorporated association may be wound up: • voluntarily under the rules by the members passing a special resolution to that effect or as provided in the Associations Incorporation Acts (see, for example: Associations Incorporation Reform Act 2012 (Vic), s 125). • by order of the Court on the grounds set out in the statute (see, for example: Associations Incorporation Reform Act 2012 (Vic), s 126); or • in South Australia, Victoria and the Northern Territory on the certificate of the Registrar, or other appropriate official, on the grounds listed in the statute: (see for example: Associations Incorporation Reform Act 2012 (Vic), s 127). The grounds for winding up an incorporated association by the Court are essentially the same as for companies: for example, Associations Incorporation 504 [9.520]

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Business Organisations

Reform Act 2012 (Vic), s 126. Similar but broader grounds may be relied on by the Registrar: for example, Associations Incorporation Reform Act 2012 (Vic), s 127.

Distribution of surplus assets [9.550] After an incorporated association has been wound up or its registration has been cancelled and its debts and other liabilities have been paid, it is necessary to dispose of any surplus assets which were owned by the association. In many instances the rules will provide that surplus assets are to be transferred to another association with similar objects and purposes. In most Australian jurisdictions an association’s rules will be subject to the overriding provisions in the Associations Incorporation Acts which: • prohibit any distribution of surplus assets to the members of the former association; and • impose a varying degree of judicial control over any other proposed disposition. In Queensland, the members have power to decide on the disposition of surplus assets by special resolution, regardless of the manner in which an association was wound up.

Companies registered under the Corporations Act [9.560] The focus of this book is on companies registered under the Corporations Act 2001 (Cth) (Corporations Act). There are several different types of companies that can be registered. These different types of companies can be classified according to liability of the members, public status and size.

Companies classified according to liability of members [9.570] The main way companies are classified is according to the liability of members. [9.580] Note: Prior to 1995, a company could be limited by shares and guarantee and any such company could be either a proprietary or public company. Any company limited by shares and guarantee registered between 9 December 1995 and 1 July 1998 had to be a public company. From 1 July 1998 it was no longer possible to register a company limited by both shares and guarantee. Transitional provisions preserve the status of the very small number of existing companies limited by both shares and guarantee.

[9.580] 505

Business and Corporate Law

Figure 9.2: Classification of companies according to liability of members

Limited by shares [9.590] A company limited by shares (whether public or proprietary) is by far the most common form of company. In the event that a company does not have sufficient assets to meet all its debts, each member (called a “shareholder”) is only liable for the amount, if any, that remains unpaid on their shares: Corporations Act, s 9 (definition of “company limited by shares”) and s 516. For example, if 1,000 shares have been allotted at an issue price of $1.20, the full extent of that member’s liability for debts incurred by the company is $1,200. The name of a company limited by shares must end in either “Limited” or “Ltd” for public companies or “Proprietary Limited” or “Pty Ltd” for proprietary companies also commonly referred to as private companies, to indicate that the liability of the members is limited in this way. The shares are usually paid for in full at the time of issue. Alternatively, “partly paid” shares may be issued where some of the issue price will be paid on allotment with the balance paid in instalments when requested or “called up” by the company as it needs further capital: Corporations Act, s 254A(1)(c). The limitation of personal liability in this way is the main incentive for use of this type of company. It is important to appreciate that this advantage is often negated for small business operators unless the company has substantial assets. Financial institutions commonly insist that personal guarantees be given in addition to security over the company’s assets. Thus, while the controllers will not be personally liable as members for any default in repayments by the company to unsecured creditors, they will be liable in their personal capacity as guarantors.

Limited by guarantee [9.600] In a company limited by guarantee, a member is not required to contribute any capital unless and until there is a shortfall when the company is 506 [9.590]

Business Organisations

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wound up: Corporations Act, s 9 (definition of “company limited by guarantee”) and s 517. The company’s constitution must prescribe the amount of the guarantee – that is, the amount that each member is bound to contribute if necessary: Corporations Act, s 117(2)(m). For example, if the guarantee stated in the constitution is $10 per member then that is the full extent of each member’s liability in the event that the company is unable to pay its creditors in full when it is wound up. The difference between a company limited by guarantee and a company limited by shares is the timing of the capital contribution. Because members of a company limited by guarantee do not contribute until a winding up, there is no injection of working capital when the company is formed or when additional people become members. Therefore, this type of company is usually not suitable for commercial enterprises. Virtually all companies that are limited by guarantee are not-for-profit organisations that raise funds from other sources such as grants, subscriptions, social activities and public appeals. This is reflected in the fact that, since 1 July 1998, the only new companies that may be registered without the word “limited” in their name are companies limited by guarantee that are formed solely for charitable purposes: Corporations Act, s 150.

No liability [9.610] No liability companies evolved to cater for the speculative nature of the mining industry. See s 112(2) of the Corporations Act: SECTION 112(2) Types of companies No liability companies (2)

A company may be registered as a no liability company only if: (a)

the company has a share capital; and

(b)

the company’s constitution states that its sole objects are mining purposes; and

(c)

the company has no contractual right under its constitution to recover calls made on its shares from a shareholder who fails to pay them.

Note 1: Section 9 defines mining purposes and minerals. Note 2: Special provisions on no liability companies are found in the sections referred to in the following table: [not extracted].

A member of a no liability company will not be liable to pay any “calls” (that is, instalments of the issue price of partly paid shares). If, because the company needs further capital, it makes a call on the shares, the member can choose either to pay the call or to forfeit the shares: Corporations Act, s 254Q(1). Thus, [9.610] 507

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there is “no liability” to pay any unpaid amount on the shares (contrast with a company limited by shares): Corporations Act, s 254M. The name of a no liability company must end in “NL”. Section 112(2)(b) of the Corporations Act above provides that a no liability company must be a mining company – that is, it must have a provision in its constitution that limits its business to mining purposes as defined in s 9 of the Corporations Act: see also Corporations Act, s 125. However, not all mining companies are no liability companies. In some circumstances, it may be preferable for a mining enterprise to be conducted as a company limited by shares in order to avoid the restrictions imposed on no liability companies under s 112(2) of the Corporations Act (and other provisions in the Corporations Act 2001 (Cth)).

Unlimited company [9.620] An unlimited company must have a share capital but there is no limit placed on the liability of the members: Corporations Act, s 9 (definition of “unlimited company”) and s 112(1). That is, unlike a company limited by shares, the liability of the members is not limited to the issue price. These companies resemble partnerships in that a single member can be liable for the full amount of any shortfall between the company’s assets and its debts, if other members cannot pay. Because the members do not have limited liability, an unlimited company is not required to add a suffix after its name. Some legal and accounting practices are conducted as unlimited liability companies because professional rules do not allow any other form of incorporation. Liability is not limited, but the other advantages of incorporation are still obtained.

Companies classified by public status [9.630] As well as being classified according to the liability of the members, all companies under the Corporations Act 2001 (Cth) are also classified as either public or proprietary. Proprietary companies are divided into a further subclassification of “small” or “large”. A small percentage of public companies are listed on the Australian Securities Exchange Ltd (ASX). To obtain listing, companies must comply with the ASX Listing Rules. Proprietary companies are by far the most popular type of company, and subsidiaries of public companies are often proprietary companies. A public company is any company that is not a proprietary company: Corporations Act, s 9 (definition of “public company”). A proprietary company is any company that registers as, or converts to, a proprietary company:

508 [9.620]

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| TOPIC 9

Corporations Act, s 45A(1). Registration as, or conversion to, a proprietary company requires compliance with the restrictions contained in s 113(1) and (3) of the Corporations Act. SECTION 113(1), (3) Proprietary companies (1)

A company must have no more than 50 non-employee shareholders if it is to: (a)

be registered as a proprietary company; or

(b)

change to a proprietary company; or

(c)

remain registered as a proprietary company.

Note: Proprietary companies have different financial reporting obligations depending on whether they are small proprietary companies or large proprietary companies (see section 45A and Part 2M.3). (2)

…

(3)

A proprietary company must not engage in any activity that would require disclosure to investors under Chapter 6D, except for an offer of its shares to: (a)

existing shareholders of the company; or

(b)

employees of the company or of a subsidiary of the company.

Note: If a proprietary company contravenes this subsection, ASIC may require it to change to a public company (see section 165).

The policy underlying the Corporations Act 2001 (Cth) is to impose greater ongoing reporting obligations on public companies than on proprietary companies. Proprietary companies are, therefore, less costly to administratively maintain. It is easy to distinguish whether a company is a proprietary or public company from its name (Corporations Act, ss 148 – 149): • a proprietary company limited by shares will have “Pty Ltd” as part of its name; • a public company limited by shares will only have “Ltd” as part of its name; and • a no liability company (which must be a public company) will have “NL” as part of its name. There are other differences between a public company and a proprietary company, for example, the number of directors required and the internal rules that apply. The main difference is the ability of public companies to raise funds from the public by complying with the disclosure requirements in Ch 6D: [9.630] 509

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Corporations Act, s 113(3). If, at any time, the prohibition on fundraising becomes an onerous restriction for a proprietary company, it is possible for the company to convert to a public company.

Small Business Guide [9.640] Part 1.5 of the Corporations Act 2001 (Cth) is a plain English guide to the main rules in the Corporations Act that apply to proprietary companies limited by shares. Because a proprietary company limited by shares is the most common type of company used by small business, it is intended to help those involved in such businesses understand their basic legal obligations. It refers the reader to the relevant sections of the legislation and is a useful summary of the registration and ongoing requirements of a proprietary company. [9.650] The summary is as follows: Figure 9.3: Summary – public and proprietary companies

Proprietary companies classified according to size [9.660] Proprietary companies are further classified as “small” or “large” by applying certain objective tests of size and value to the business. Thus, the classification of a company may vary from year to year – it cannot choose to be permanently small or large. The definitions of “small” and “large” are contained in s 45A(2) – (4) of the Corporations Act: SECTION 45A(2) – (4) Proprietary companies Small proprietary company (2)

A proprietary company is a small proprietary company for a financial year if it satisfies at least 2 of the following paragraphs: (a)

510 [9.640]

the consolidated gross operating revenue for the financial year of the company and the entities it controls (if any) is less than $25 million, or any other amount prescribed by the regulations for the purposes of this paragraph;

Business Organisations

| TOPIC 9

(b)

the value of the consolidated gross assets at the end of the financial year of the company and the entities it controls (if any) is less than $12.5 million, or any other amount prescribed by the regulations for the purposes of this paragraph;

(c)

the company and the entities it controls (if any) have fewer than 50 employees at the end of the financial year.

Note: A small proprietary company generally has reduced financial reporting requirements (see subsection 292(2)). Large proprietary company (3)

A proprietary company is a large proprietary company for a financial year if it satisfies at least 2 of the following paragraphs: (a)

the consolidated gross operating revenue for the financial year of the company and the entities it controls (if any) is $25 million or any other amount prescribed by the regulations for the purposes of paragraph (2)(a), or more;

(b)

the value of the consolidated gross assets at the end of the financial year of the company and the entities it controls (if any) is $12.5 million or more or any other amount prescribed by the regulations for the purposes of paragraph (2)(b), or more;

(c)

the company and the entities it controls (if any) have 50, or any other number prescribed by the regulations for the purposes of paragraph (2)(c), or more employees at the end of the financial year.

When a company controls an entity (4)

For the purposes of this section, the question whether a proprietary company controls an entity is to be decided in accordance with the accounting standards made for the purposes of paragraph 295(2)(b) (even if the standards do not otherwise apply to the company).

Advantages of classification: reporting burden relief [9.670] The aim of the distinction is to ensure that truly small business operations have a reduced regulatory burden. Large businesses (that are still run as proprietary companies) need to have more demanding reporting obligations because, as a matter of policy, public accountability obligations (particularly to creditors) are thought to outweigh the consideration of [9.670] 511

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commercial confidentiality. Unlike large proprietary companies, disclosing entities, public companies and registered schemes, small proprietary companies generally do not have to prepare financial reports or have them audited: Corporations Act, s 292(1) and (2) and ASIC Regulatory Guide 115.

Audit requirement relief: ASIC Regulatory Guide 115 [9.680] Difficulties arise with companies that fall somewhere between those that are clearly “small” or “large”. ASIC does, however, have power to relieve a proprietary company from the audit requirements imposed by the Corporations Act in the circumstances set out in s 342(1) of the Corporations Act. Section 342(2) and (3) of the Corporations Act set out the factors ASIC must consider when exercising its discretion – for example, the expected costs and practical difficulties for the company weighed against the expected benefits of compliance: see Incat Australia Pty Ltd v ASIC (2000) 33 ACSR 462; Re SRKKK and ASIC (2002) 42 ACSR 551. ASIC has issued a Regulatory Guide which sets out the conditions under which it will relieve large proprietary companies from the audit requirements: see ASIC Regulatory Guide RG 115 (formerly Policy Statement 115): “Audit Relief for Proprietary Companies”.

Proposals for reform to classification of companies: Corporations Act vs Accounting and Auditing Standards [9.690] In March 2001, the Parliamentary Joint Committee on Corporations and Securities (now the Parliamentary Joint Committee on Corporations and Financial Services) recommended major changes to this system of classification in its “Report on Aspects of the Regulation of Proprietary Companies”. One of the recommendations of the Joint Committee’s report was to replace the current distinction between “large and small” found in s 45A of the Corporations Act, with the previous distinction involving exempt and non-exempt proprietary companies. One of the key reasons for the proposed reform to the classification of companies was to align the reporting requirements under the Corporations Act 2001 (Cth) with that of the Australian Accounting and Auditing Standards. Under the Accounting Standards, an entity that meets the definition of “reporting entity” under the Australian Accounting Standards must comply with all relevant accounting standards when compiling its annual report. The requirement under the accounting standards is at odds with the Corporations Act reporting requirements for small proprietary companies. As of January 2016 the Corporations Act has not been amended to reflect the recommendations of the Parliamentary Joint Committee. [9.695] The following is the 2015 total number of companies registered in Australia.

512 [9.680]

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Table 9.3: Statistics – Company registrations in Australia from 2009 – 2015 2014/15 2013/14 2012/13 2011/12 2010/11 2009/10 Companies 2,245,363 2,118,666 2,012,241 1,921,545 1,839,772 1,768,526 registered in Australia ASIC Annual Report 2014-15, 5.5.1 Summary of Key Stakeholder Data 2009-15, available at: http://www.download.asic.gov.au/media/3437945/asic-annual-report-2014-15-full.pdf

Change of status [9.700] After a company has been registered it is possible, in most instances, for it to convert to another type of company. The procedures set out in ss 163 – 164 of the Corporations Act must be followed. The requirements vary depending on the nature of the change, but include a special resolution of members. In some situations ASIC may alter a company’s status. For example, if a proprietary company has not complied with the requirements of s 113 of the Corporations Act, ASIC may change the company’s registration from a proprietary company to a public company: Corporations Act, s 165(3). Section 162 of the Corporations Act sets out the changes of status that are permitted: see also “ASIC Information Sheet: Changing Company Type” (INFO 18) available at http://www.asic.gov.au or from any ASIC office.

REGISTRATION Which bodies must be registered? [9.710] All companies and some other corporations that wish to carry on business in Australia must be registered under the Corporations Act 2001 (Cth). Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act) [9.712] Chapter 2—Aboriginal and Torres Strait Islander corporations, in particular Part 2–3—Applications for registration of an Aboriginal and Torres Strait Islander corporation and Division 29—What are the basic requirements for registration?;Part 3–3—Minimum Number of members in Aboriginal and Torres Strait corporatios, Division 77–5—Minimum number of members of Aboriginal and Torres Strait Islander corporations of the CATSI Act. It is important to note that the CATSI Act provides for an “indigeneity requirement” which reflects the “special measure” provision in the Preamble as follows: The Parliament of Australia intends that the following law will take effect according to its terms and be a special law for the descendants of the original inhabitants of Australia. The law is intended, for the purposes of paragraph 4 of Article 1 of the International Convention on the Elimination of All Forms of Racial [9.712] 513

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Discrimination and the Racial Discrimination Act 1975, to be a special measure for the advancement and protection of Aboriginal peoples and Torres Strait Islanders. The “indigeneity requirement” is found in Division 29-5: An Aboriginal and Torres Strait Islander corporation meets the Indigeneity requirement if the corporation has the following required number or percentage of its members who are Aboriginal and Torres Strait Islander persons: (a)

if the corporation has 5 or more members—at least the percentage of members prescribed in the regulations for the purposes of this section;

(b)

if the corporation has fewer than 5 members but more than one member—all of the members, or all but one of the members;

(c)

if the corporation has only one member—that member.

For the meaning of Aboriginal and Torres Strait Islander person, see section 700–1.

Pre-existing companies [9.720] Companies incorporated in Australia prior to 1 January 1991 and foreign companies registered in Australia at that time were automatically transferred to the Corporations Act when it came into force. Their certificates and documentation were recognised and taken over by ASIC.

Registrable Australian bodies [9.730] Some types of corporations, such as incorporated associations and co-operatives, are governed by specific State or Territory legislation and are normally excluded from the operation of the Corporations Act: s 5F. However, such bodies are included in the definition of “registrable Australian bodies”: s 9. These bodies must register under Pt 5B.2, Div 1 if they wish to carry on business outside their home State or Territory.

Foreign companies [9.740] Foreign companies (that is, companies incorporated outside Australia: s 9) that wish to carry on business in Australia must obtain registration: see Pt 5B.2, Div 2.

Incorporation [9.750] Incorporation (that is, the process of becoming a body corporate) occurs upon registration by ASIC. The company is a separate legal entity from that date until its name is removed from ASIC’s register following deregistration. 514 [9.720]

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| TOPIC 9

Shelf companies [9.760] When a person wants to incorporate a company or transfer their existing business to a company, they may buy a “shelf company” from an accountant or solicitor. A shelf company is a company that is already in existence (that is, registered by ASIC under the Corporations Act 2001 (Cth)) but has not traded – it is sitting “on the shelf”. All that happens is that the name is changed and the shares are transferred to the new owner. If necessary, the internal rules can be altered.

Registration [9.770] Part 2A.2 sets out the requirements and procedure for registration. See Figure 9.4 at [9.790]. The registration process has been streamlined so that the key step for every type of company is the lodging of an application form. The contents of the application are listed in s 117(2) and there is a standard form (Form 201) prescribed by Sch 2 to the Corporations Regulations 2001 (Cth) (Corporations Regulations). For a company with share capital, a $463 fee (as at 2016) is payable when the form is lodged. For a company without share capital, a fee of $382 (as at 2016) is payable. The application can be lodged over the counter at an ASIC business centre or via the internet using the Electronic Company Registration (ECR) service. This service enables the entire process of registration to be conducted online within a few minutes and substantially reduces the administrative costs involved. Prior to lodging the completed application form, decisions will need to be made about the following: • what type of company is to be registered; • what form the internal rules are to take – constitution or replaceable rules or a combination of both; • who is to be the first member or members; • who is to be the first director or directors, and who is to be the company secretary (s 204A, optional for a proprietary company); • what (if any) share capital there is to be; • where the registered office of the company will be; and • what is to be the company’s name (if a name other than the company’s Australian Company Number (ACN) is to be used).

[9.770] 515

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Certain names cannot be used. Note s 119: SECTION 119 Company comes into existence on registration A company comes into existence as a body corporate at the beginning of the day on which it is registered. The company’s name is the name specified in the certificate of registration. Note: The company remains in existence until it is deregistered (see Chapter 5A).

Certificate of registration [9.780] Once the application has been processed, ASIC gives the company its ACN and issues a certificate of registration: s 118(1). The certificate of registration contains the following information: • the company’s name; and • the company’s ACN; and • the company’s type; and • that the company is registered as a company under the Corporations Act; and • the State or Territory in which it is registered; and • the date of registration. Section 1274(7A) provides that the certificate of registration is conclusive evidence that: (a)

all requirements of this Act for its registration have been complied with; and

(b)

the company was duly registered as a company under this Act on the date specified in the certificate.

516 [9.780]

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| TOPIC 9

[9.790] The following figure shows the process for the registration of a proprietary company. Figure 9.4: Steps for registration of a proprietary company

[9.790] 517

Business and Corporate Law

Registered office [9.800] The application for registration must include the address of the company’s registered office in Australia. The purpose of the registered office is to have a place where all communications and notices to the company may be sent: s 142. It is not sufficient to specify a post office box, but the registered office can be premises occupied by someone else (for example, the company’s accountant): s 100. A proprietary company is not required to open its registered office to the public but this does not affect its obligation to make certain documents available for inspection: ss 173, 1300. However, a public company should have its registered office open to the public each day for at least three hours per day: s 145.

Australian Company Numbers (ACNs) and Australian Business Numbers (ABNs) [9.810] As previously mentioned, ASIC allots every company an ACN upon registration. Registrable Australian bodies are also given a number known as an “Australian Registered Body Number” (ARBN): s 601CB. For details about the proper use of numbers (ACNs and ARBNs) and company names see ASIC Regulatory Guide 13: ACN, ARBN and Company Names. Since the introduction of the Australian Business Number (ABN) as part of the tax reform package that came into force on 1 July 2000, all companies have now been allocated an ABN (defined in Corporations Act 2001 (Cth), s 9) that will progressively replace the ACN and ARBN as the single business identifier for Commonwealth purposes. The ABNs allocated to companies and registered bodies are derived by adding two digits in front of the existing nine-digit ACN or ARBN. As long as the last nine digits of a company’s ABN are the same, and in the same order, as its ACN or ARBN, the quotation of an ACN, ARBN or ABN on documents satisfies the requirements of the Corporations Act 2001 (Cth): see Corporations Act, ss 123(1), 153(2), 1344; Corporations Regulations, regs 2B.6.03, 5B.3.03 and the list of exemptions in reg 7004, Sch 7. This identifying number must be: • shown on the company’s common seal (if any) (s 123(1)); • shown on its public documents (as defined in s 88A) and on negotiable instruments (ss 153–155, see ASIC Regulatory Guide 13 and National Education Advancement Programs Pty Ltd v Ashton (1996) 14 ACLC 30); • displayed prominently at every place at which the company carries on business and that is open to the public (s 144); and • shown on all documents lodged with ASIC: s 88A(1)(a).

Company names [9.820] Provisions relating to the use of company names are contained in Pt 2B.6 and those dealing with foreign companies and registrable Australian bodies are contained in Pt 5B.3. 518 [9.800]

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The company’s name is chosen by the promoters and application can be made to “reserve” the name prior to lodgment of the application for registration of the company: s 152. Alternatively, the name may simply be the company’s ACN. Company names must also include words or abbreviations to show their type – for example, “Pty” for proprietary companies, “Ltd” for limited liability companies and “NL” for no liability companies: ss 148–149. This serves as notice to those intending to deal with these companies that the liability of the members is limited. This is not required for unlimited companies, the members of which do not have limited liability.

Exclusion of “Limited” [9.830] Companies limited by guarantee that are established for charitable purposes may, if their constitution contains certain restrictions, be registered without the word “Limited” in the company name or apply to ASIC for removal of “Limited” from their name: s 150.

Restrictions on certain names [9.840] Promoters who wish to use a name for their company should first search the register of companies to see if the name they have chosen is available. See s 147(1): SECTION 147(1) When a name is available Name is available unless identical or unacceptable (1)

A name is available to a company unless the name is: (a)

identical (under rules set out in the regulations) to a name that is reserved or registered under this Act for another body; or

(b)

identical (under rules set out in the regulations) to a name that is included on the national business names register in respect of another individual or body who is not the person applying to have the name; or

(c)

unacceptable for registration under the regulations.

Care should also be taken not to choose a name that infringes a trade mark or that closely resembles an existing company or business name. This could be seen as “passing off” – that is, appearing to be another company. The tort of passing off is a breach of the general law and may also be a breach of s 18 of the Australian Consumer Law contained in the Competition and Consumer Act 2010 (Cth). The rules stating how ASIC is to determine whether names are “identical” or “unacceptable” for the purposes of s 147(1)(c) are contained in Sch 6 to the [9.840] 519

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Corporations Regulations 2001 (Cth). For example, words which imply a connection with the Crown or government and those which ASIC considers offensive are “unacceptable”: Corporations Regulations, reg 6203, Sch 6. For a discussion of what is an “offensive” name, see the decision in Re Little and Australian Securities Commission (1996) 14 ACLC 1,730 where the (then) ASC’s decision to register a company under the name “Virgin Mary’s Pty Ltd” was overturned by the Administrative Appeals Tribunal. See also ASIC Information Sheet: Company Name Availability (INFO 71) available at http:// www.asic.gov.au or from any ASIC office.

CONSEQUENCES OF REGISTRATION Effect of registration [9.850] Upon registration, a company comes into existence as a separate “body corporate”: s 119 of the Corporations Act 2001 (Cth). A body corporate or company is regarded as a “person” for legal purposes, although there are differences between it and “natural” persons. Companies gain their powers from the Corporations Act: s 124. Although companies are given the powers of a natural person (with some limitations), companies can only act through humans because they have no minds of their own (nor physical bodies). The fact that a separate legal “person” comes into existence has several consequences. Some of these consequences were referred to in ealier in this topic when a company was compared with other forms of association. Because a company is a separate legal person, it can: • sue and be sued in its own name; • continue to exist despite changes to its membership (often referred to as “perpetual succession”) – a company only ceases to exist when it is deregistered and struck off the register of companies maintained by ASIC; • acquire, hold and dispose of assets – members may own shares in the company but that does not confer on them a proprietary interest in the assets of the company (Macaura v Northern Assurance Co Ltd [1925] AC 619) [this means the members cannot dispose of a company’s assets as if they owned them] nor does it allow them to fraudulently apply the company’s property for their own benefit, even if that person is the company’s sole member and sole director (Macleod v R (2003) 214 CLR 230); • enter into contracts and incur liabilities in its name; and • is capable of performing all the functions of a body corporate. Section 124 of the Corporations Act 2001 (Cth) states “a company has the legal capacity and powers of an individual both in and outside this jurisdiction”. The Corporations Act 2001 (Cth) also provides that a company has the following additional powers: • to distribute company property to members; 520 [9.850]

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• to grant security over company assets; • to register itself in other jurisdictions; • to issue and cancel shares in itself ; • to grant options over unissued shares; • to issue debentures; and • to do any other act as permitted by law. Because a company is recognised as a separate legal entity, it is possible for the members of a company to enjoy limited liability. Put another way – the doctrine of separate legal entity facilitates limited liability. The liabilities (and assets) belong to the company and, in a limited liability company, the members’ liability is limited to the amount (if any) unpaid on the shares or the amount of the guarantee given by the member. Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act) Chapter 2—Aboriginal and Torres Strait Islander corporations, in particular Part 2-5-Division 42—Effects of Registration of the CATSI Act. 42–1 Corporation comes into existence on registration If an Aboriginal and Torres Strait Islander corporation is registered under Part 2–3 as a result of an application made under section 21–1, the Aboriginal and Torres Strait Islander corporation comes into existence as a body corporate with perpetual succession at the beginning of the day on which it is registered. The corporation remains in existence until it is deregistered (see Chapter 12). 42–3 Effect of registration of existing body corporate under Part 2–3 If a body corporate is registered under Part 2–3 as an Aboriginal and Torres Strait Islander corporation as a result of an application made under section 22–1, registration under Part 2–3 does not: (a)

create a new legal entity; or

(b)

affect the body’s existing property, rights or obligations (except as against the members of the body in their capacity as members); or

(c)

render defective any legal proceedings by or against the body or its members.

The Aboriginal and Torres Strait Islander corporation remains in existence until it is deregistered (see Chapter 12).

[9.860] Economic arguments are made for the existence of limited liability. However, there are also disadvantages. The risk of business failure is largely shifted to creditors. Some creditors can protect themselves against such a risk (by such means as obtaining sufficient security from the company or building an allowance into the price of their goods and services), or by registering their [9.860] 521

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interest in the Personal Property Securities Register (see Personal Property Securities Act 2009 (Cth)), but others cannot. For example, tort claimants (who are “involuntary” creditors) are unable to protect themselves in the same way. Their position is discussed in Topic 12. Figure 9.5: Effect of registration

The company as a separate legal person [9.870] The full implications of a company being a separate legal person (that is, separate and distinct from its members and directors) were not recognised until the famous case of Salomon v Salomon & Co Ltd [1897] AC 22 in 1897.

Salomon v Salomon [9.880] Salomon v Salomon & Co Ltd [1897] AC 22 (House of Lords) FACTS: Salomon had carried on a successful business as a sole trader for over 30 years. In order to provide for his sons who, “troubled him all the while” for a share in the business, he incorporated it as a company limited by shares. At that time the Companies Act required a company to have a minimum of seven subscribers (the people who signed the application for incorporation). These were Salomon, his wife and five of his adult children, each of whom subscribed for one share in the company. After the company was registered it allotted 20,000 shares to Salomon as part payment for the transfer of his existing business to the company. The remainder of the purchase price was owed to Salomon by the company and this loan was secured by a debenture: see Topic 17. Thus, Salomon was a secured creditor of the company as well being the holder of almost all its shares. Although the business was now owned by the company, not by Salomon, there was no change in the way it was run, with Salomon continuing to make all the major decisions in the same way as he had done before he transferred the business to the company. The business had been very prosperous but, shortly after it was sold to the company, it faced financial difficulties and was eventually put into liquidation: see Topic 19. The company’s assets were insufficient to pay both Salomon (as a secured creditor) and the unsecured creditors. The liquidator (acting on behalf of the unsecured creditors) argued that Salomon was not entitled to be treated as a secured creditor. He alleged that because Salomon was effectively in complete control of the company, the company was acting either as an agent or a trustee for him in running the business. In either case, Salomon 522 [9.870]

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would have been required to indemnify the company for the debts it incurred on his behalf and he certainly would not have been entitled to any priority over the unsecured creditors. DECISION: The House of Lords held that, even though Salomon controlled the company, the company was a separate legal entity and it, not Salomon, was running the business so Salomon was entitled to recover the secured debt owed to him. Once a company was validly incorporated (today we say “registered”) it became a separate legal entity and as Lord Macnaghten said (at 51): the company is at law a different person altogether from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act.

[9.890] Since this case, many writers have debated the merits of what was, at that time, considered by many people to be a calamitous decision. Should “one-person companies” be able to take advantage of the corporate form, often to the disadvantage of unsecured creditors?

Corporate veil [9.900] The “corporate veil” exists once a company is registered and it separates the company from the people who formed it (and from those who become its members). [9.910] Figure 9.6: Company separate from members Veil COMPANY

MEMBERS

• separate legal entity with own

• own shares but not a proprietary interest in the company’s assets

– assets

• may also be a creditor, debtor or director of the company

– liabilities

• have their own assets which are not in the company’s control

[9.910] 523

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Veil COMPANY

MEMBERS

– contracts Sometimes people form a company to take advantage of the veil of incorporation because it acts as a shield to protect them from personal liability, particularly in the event of insolvency of the company. The continuing problem of “phoenix companies” illustrates one situation where unscrupulous entrepreneurs have used the corporate form to avoid creditors. “Phoenix company” is not a legal or statutory term. It is used to describe a company that has failed, leaving behind unpaid creditors but, soon after, “rises (like a phoenix) from the ashes” with the same directors, often at the same address and using a similar name etc, operating under the guise of a new company. The new company then disclaims all responsibility for the debts of the old company on the basis of the separate legal entity doctrine. There have been a number of statutory reforms that have attempted to address this problem, for example: the Corporations Amendment (Phoenixing and Other Measures) Act 2012 (Cth). Earlier statutory reform clarified and reorganised the provisions dealing with disqualification from managing corporations (see Pt 2D.6 and Topic 13) and increased protection for employee entitlements. Auditors are required to notify ASIC of any significant contravention of the Corporations Act (s 311), but small proprietary companies are not required to appoint an auditor. An additional factor is that unsecured creditors often do not bother to appoint a liquidator (there is no value for them in the extra expense) and, without a report from an auditor or a liquidator, the situation can go unnoticed by ASIC. The Corporations Act 2001 (Cth) now permits ASIC to liquidate abandoned companies. Furthermore the Federal Government provides an Assetless Administration Fund that provides money for liquidators to investigate contraventions of the Corporations Act and such investigations may uncover phoenix activity. It is also important to remember that, although ASIC has wide powers under Pt 2D.6, it has limited resources. In other situations, the fact that a company is a separate legal entity may seriously disadvantage its controllers. They may then seek to have the veil lifted: see, for example, Macaura v Northern Assurance Co Ltd [1925] AC 619; Smith Stone & Knight Ltd v Birmingham Corp [1939] 4 All ER 116; and Renato Evangelisti Nominees Pty Ltd v EEC (1990) Pty Ltd (in liq) (1995) 13 ACLC 1378. This is sometimes referred to as a “reverse lifting” of the corporate veil.

Lifting the corporate veil [9.920] Usually, it is outsiders who wish to lift or pierce the corporate veil in order to gain access to assets. The veil may be lifted by either: • a specific statutory provision; or 524 [9.920]

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| TOPIC 9

• applying general law principles. These statutory provisions and general law principles have developed in response to abuses of the company’s separate legal status. For topical examples of abuses of the corporate form, see [4.110]-[4.130].

Statute [9.930] Taxation, occupational health and safety and environmental protection statutes are among those that provide for lifting the corporate veil, as do various regulatory regimes such as banking, foreign investment, broadcasting and gaming. Certain sections of the Corporations Act 2001 (Cth) also lift the corporate veil by imposing personal liability or other restrictions on members, directors or other officers of the company. Some examples in the Corporations Act which are discussed later in this book, include: • insolvent trading – where the company continues to trade even though there were reasonable grounds for suspecting that it would not be able to pay its debts (under ss 588G – 588M directors can be liable, and under ss 588V – 588X the holding company (the member) can be liable: see Topics 13 and 19); • uncommercial transactions – certain transactions that occur prior to a company going into liquidation are voidable as against a liquidator, and the court has wide powers to order compensation by the party (who is commonly a director, member or a party related to them) who has received the benefit of the “uncommercial transaction” (see ss 588FB – 588FF and Topic 19); a company which enters into an uncommercial transaction is deemed to incur a debt for the purposes of the insolvent trading provisions (s 588G(1A) see Topics 13 and 19); • unreasonable director-related transactions – transactions including payments, transfer of property or issue of securities made in favour of a director or a close associate of a director in circumstances where a reasonable person in the company’s position would not have entered into the transaction (s 588FDA, see Topic 19; • employee entitlements – transactions entered into with the intention of defeating employees’ rights to their entitlements are prohibited; any breach is subject to criminal and civil penalties and the offenders may be required to pay compensation for any loss or damage (Pt 5.8A, see Topics 13 and 19; • company officer security interests – officers granted security interests by the company over the company’s assets (that is, security) cannot enforce their security interest within six months unless the court grants leave to do so (s 588FP (a security interest is defined as a PPSA security interest within the meaning of the Personal Property Securities Act 2009 (Cth) or a charge, lien or pledge, and charge is defined in s 9 as one “created in any way and includes a mortgage”) and see Topic 17); and [9.930] 525

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• financial assistance – if a company provides “financial assistance” for the purchase of its shares, it is the person “involved in” the company’s contravention (typically, a director) who is liable for a breach of the Corporations Act, not the company: s 260D(2) and see Topic 16.

General law [9.940] Other instances where the corporate veil is pierced arise where there is no relevant statutory provision but, for some overriding policy reason, a court has decided to lift the veil. Australian courts have been more reluctant than the English and United States courts to do this. For an example of this reluctance see Repatriation Commission v Harrison (1997) 78 FCR 442. The few Australian examples are in areas such as: • taxation – Commissioner of Taxation (Cth) v Whitford’s Beach Pty Ltd (1982) 150 CLR 355; • competition and consumer law – Spreag v Paeson Pty Ltd (1990) 94 ALR 679; and • tort – some judicial observations in Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549 and see Walker v Hungerfords (1987) 49 SASR 93 (there was an appeal to the High Court in this case, but not on the corporate veil issue: Hungerfords v Walker (1989) 171 CLR 125). It is difficult to reconcile the English and Australian cases beyond identifying general descriptive categories such as fraud, agency or partnership, trust, tort or avoidance of an existing legal obligation. However, there is always the possibility that there may be such special facts that the court will be prepared to lift the veil in order to prevent a “substantial injustice”: Walker v Hungerfords (1987) 49 SASR 93 (where the injustice would have been to the members); Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549; and obiter in Chen v Butterfield (1996) 7 NZCLC 261,086. [9.950] Some cases where the corporate veil has been lifted Case Re Darby [1911] 1 KB 95

Gilford Motor Co Ltd v Horne [1933] Ch 935

526 [9.940]

Issue

Was obligation imposed or advantage obtained? Obligation imposed – Liquidator claiming for secret profit made director/ promoter ordered to disgorge by director/ promoter's “dummy” profits due to presence of fraud. company. Avoidance of existing Obligation imposed – legal obligation (ie, injunction granted employment against company even restriction in service though company was contract) by setting not a party to the up a new company to service agreement. run business.

Business Organisations

Case

Issue

Smith Stone & Knight Ltd v Birmingham Corp [1939] Compensation claim by holding company 4 All ER 116 (owned the land) for disturbance of business conducted by a wholly owned subsidiary. Green v Bestobell Industries Pty Ltd [1982] WAR 1 In breach of their duties, directors formed new company which made profit from successful tender. Walker v Hungerfords (1987) 49 SASR 93 Action for compensation re negligence of accountants in preparation of partnership and individual tax returns. But, during the relation-back period, partnership had converted to company. Briggs v James Hardie & Co Pty Ltd (1989) 16 Negligence action (asbestos injury) by NSWLR 549 employee against subsidiary (employer) and holding company. Creasey v Breachwood Motors Ltd (1992) 10 ACLC 3,052

Re H (restraint order) [1996] 2 All ER 391

Allen v Feather Products Pty Ltd (2008) 65 ACSR 642

Unfair dismissal claim commenced. Business and assets transferred to another company prior to judgment. Corporate structure used as a device to perpetrate (criminal) avoidance of large amounts of excise duty. Liquidators sought to apply pooling provisions under s 579E(1)(b)(i) Corporations Act 2001 (Cth) in the winding up of three related body corporate entities so that assets distributable in the windings-up of all three entities were applied to all of their debts.

| TOPIC 9

Was obligation imposed or advantage obtained? Advantage obtained – holding company entitled to compensation since subsidiary conducted business as its “agent”. Obligation imposed – new company (and directors) ordered to account for profits made as a result of breach of duty. Advantage obtained – could claim for both pre and post incorporation losses even though duty in tort and contract owed to the individuals, not the company. Advantage obtained – succeeded at preliminary stage, ie, could also proceed against holding company. Matter sent for trial but case subsequently settled. Obligation imposed – judgment creditor allowed to claim from company now controlling the business. Obligation imposed – company assets treated as realisable assets of defendants. Application failed – could not establish that joint activity or enterprise was being conducted in order to satisfy a precondition for a pooling order.

[9.950] 527

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Case Australian and International Pilots Association v Qantas Airways Ltd [2011] FWAFB 3706

University of Sydney v Objectivision Pty Ltd [2015] FCA 1528

Kempsey Shire Council v Slade [2015] NSWLEC 135

Issue

Was obligation imposed or advantage obtained? The applicant union Corporate veil was and the respondent maintained. Court employers were in commented that it dispute over the would be lifted where coverage of an award. it could be shown One respondent was that there was a mere a wholly owned sham or façade in subsidiary of the which the company other. The applicant was playing a role. sought to bring the This was not the case. second respondent's pilots within its industrial instrument arguing that they should be regarded as a single entity. An applicant/crossA security for costs respondent sought ordered as responsecurity for costs dent/cross-claimant where respondent/ was offered a lesser cross-claimant was amount without impecunious. justification and directors were not prepared to pay security from behind the corporate veil. The respondents were Whether the found responsible for company formed by the respondents was a debt under s 105(1) for the objective of of the Protection of the avoiding a statutory Environment debt under s 105(1) of Operations Act 1997 the Protection of the (NSW). However, this Environment was not due to the Operations Act 1997 corporate veil being (NSW). lifted, as the court was not satisfied that the company had been formed to with the dominant purpose of avoiding the respondent’s obligations under the first lease: Al-Shennag v Statewide Roads Ltd [2008] NSWCA 300 at [42].

Remember: Australian courts have always shown a reluctance to lift the veil. In the absence of a clear case of fraud, the Australian courts seem unlikely to lift the veil particularly where it would result in the imposition of an obligation, rather than the conferring of an advantage. Generally, it will be necessary to rely on an express statutory provision (for example, the insolvent trading provisions).

528 [9.950]

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Corporate groups [9.960] Corporate groups are increasingly important in Australia and many other countries. There are a number of reasons why many companies operate as part of a corporate group, for example using separate companies in an attempt to reduce risk by quarantining certain assets from liability. Legally, each individual company remains a separate legal person (see [9.10]) but, commercially, many companies act together as a single unit rather than as discrete individual entities. A corporate group exists where there are either cross-shareholdings and/or cross-directorships between companies. Depending on the context, the Corporations Act 2001 (Cth) applies two different tests to determine whether the relationship between companies is sufficient for those companies to be considered to be a corporate group for legal purposes. Traditionally, the companies were required to satisfy the definition of a holding and subsidiary company in s 46 and this still applies for some purposes, in particular insolvent trading: see Topic 13. Section 46 requires the holding company to: • control the composition of the subsidiary company’s board; or • be in a position to cast or control the casting of more than half of the maximum number of votes at a general meeting; or • hold more than half of the subsidiary’s issued share capital. When this test is satisfied, the companies are considered to be “related” to each other: s 50. However, for an increasing number of purposes, the Corporations Act applies a broader definition of “control” which applies to “entities” (see the definition in s 9) as well as to companies. For the purposes of this definition, an entity (including a company) controls another entity if the first entity has the capacity to determine the outcome of decisions about the second entity’s financial and operating policies: s 50AA. For example, this “control” test applies for the purposes of the related party provisions in Ch 2E: see Topic 13. Legislation in 2007 introduced specific provisions dealing with pooling of companies in a corporate group for external administration purposes. The arrangements in the Corporations Amendment (Insolvency) Act 2007 (Cth) were designed to improve pooling arrangements for corporate groups. Under Pt 5.6, Div 8 pooling of debts in a corporate group can be achieved either voluntarily under s 574 or can be court ordered under s 579E. If pooling is court ordered a number of factors have to be satisfied under s 579E, including that the order is “just and equitable”: s 579E(12) (see also Topic 19). [9.970] The following flowchart illustrates a simple corporate group.

[9.970] 529

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Figure 9.7: A simple corporate group

In many cases, the relationship between individual companies in a corporate group will be much more complex: see, for example, Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50. The operations of a corporate group may raise corporate veil issues, often in conjunction with issues involving directors’ duties. The question of directors’ duties in the group context (for example: Can a director act for the good of the “group”, even if that action is detrimental to one of the companies?) is discussed in more detail in Topic 13. Some cases on directors’ duties have taken a slightly more flexible approach than those cases that dealt only with the corporate veil issue. A common example of the corporate veil issue arising in the context of a corporate group is where a creditor finds that their contract is with a company within the group that has no assets even though the group as a whole is solvent. Can the corporate veil of that individual company be pierced in order to allow the creditor to gain access to the assets of the group? In this situation, Australian courts have not been prepared to lift the veil. This approach has been criticised on the basis that it ignores commercial reality – the business is conducted as a group enterprise rather than as separate companies: Qintex Australia Finance Ltd v Schroders Australia Ltd (1991) 9 ACLC 109. For examples of where the Australian courts have maintained the veil in the group situation see Walker v Wimborne (1976) 137 CLR 1; Industrial Equity Ltd v Blackburn (1977) 137 CLR 567; Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 254; and Wimborne v Brien (1997) 15 ACLC 793; see also Companies and Securities Advisory Committee (CASAC, now the Corporations and Markets Advisory Committee (CAMAC)), “Corporate Groups, Final Report” (May 2000) (CASAC Report), discussed at [9.1020]. As a general rule, the Corporations Act, like the general law, preserves the separate existence of each legal entity within the group. However there are some important exceptions: • a holding company can be liable for the debts of a subsidiary that it has allowed to trade while insolvent (ss 588V – 588X and Topic 13); 530 [9.970]

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• consolidated financial statements must be prepared for the whole of a corporate group rather than each individual company (s 296, AASB (Australian Accounting Standards Board) 1024 and Chapter 15) (Yogaratnam); and • a subsidiary cannot acquire shares in its holding company or give financial assistance for that purpose: Pt 2J.2 and Topic 16.

Patrick Stevedores v Maritime Union of Australia – an illustration of the problems of corporate groups [9.980] In 1997 the well-publicised dispute between the Patrick Stevedore Group (the Group) and the Maritime Workers Union of Australia (MUA) brought the doctrine of separate legal entity into sharp focus. The boards of certain companies in the Group resolved that the companies were or were likely to become insolvent and so placed the companies into voluntary administration: see Topic 19. The administrators dismissed the entire workforce (some 1,400 people) and, because the companies were insolvent, the employees would have been unlikely to receive their full entitlements such as long service leave. The MUA sought and obtained interlocutory orders preventing the dismissals from going ahead. These were upheld on appeal by the High Court.

Restructuring [9.990] Prior to the companies being put into voluntary administration, the Group had undertaken a major restructuring. The majority judgment of the High Court (Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (No 3) (1998) 195 CLR 1) summarised the transactions involved in the restructure (at 19-20 and 21): In or before September 1997, officers of the Group decided to reorganise the Group in a manner which affected the capital structure, business, debts and inter-company accounts of the employer companies. The reorganisation was not then known to the employees. First, the employer companies sold their stevedoring businesses to Patrick Stevedores Operations No 2 Pty Ltd (“Patrick Operations No 2”) for a price of $314.9 million. The employer companies thus disposed of their property, plant, equipment and all contractual interests save those relating to their employees. The employer companies ceased to carry on the business of stevedores. Their businesses were reduced to the provision of their employees’ labour to the stevedore – at first Patrick Operations No 2 and subsequently Patrick Stevedores Operations Pty Ltd (“Patrick Operations”), another wholly-owned subsidiary of Patrick Holdings. The agreements (“the Labour Supply Agreements”) under which each employer company supplied labour to Patrick Operations No 2 (and, later, to Patrick Operations) gave the stevedoring company the right to terminate the agreement without notice if there were any interference with, delay in or hindering of the supply of labour. Thus the security of the employer companies’ businesses was extremely tenuous. The security of the employees’ employment was consequentially altered to their prejudice. … [9.990] 531

Business and Corporate Law

The effect on the employees might have been less had the purchase price for the businesses of the employer companies been paid to and retained by those companies. But, after applying so much of the purchase price as was needed to discharge intra-Group loans and other debts owing by the employer companies, a significant amount – counsel variously stated the amount as $60 million or $70 million – was expended in buying back shares in the employer companies. Assuming that the buy-back was authorised by s 206B of the Corporations Law [now s 257A of the Corporations Act, buy-backs are discussed in Chapter 18] … the shares bought back were cancelled immediately after the registration of their transfer. The issued capital and shareholders’ funds of the employer companies were reduced accordingly. The result of this restructuring was that somewhere between $60 and $70 million of the capital of the employer companies, which would have been available to finance their business operations, was returned to the shareholders.

In summary, therefore, as a result of those transactions in September 1997, one company (Patrick Operations No 2 Pty Ltd and, later, Patrick Operations Pty Ltd) held all the assets and the other companies (the employer or labour supply companies) held no assets except a contractual right to supply labour (if required). This contract could be terminated immediately if there was any interruption to the labour supply. When the MUA initiated industrial action, the contract was terminated, the employer companies were placed in voluntary administration and the employees were dismissed. Any claims by the employees lay only against the employer companies that hired them but that now had no assets. [9.1000] The restructure of Patrick Stevedores is described in figure 9.8. Figure 9.8: Patrick Stevedores’ restructuring

Note: Dotted lines indicate the flow of funds into the employer companies (from the business and asset sale), but then out of those companies to the parent company to repay loans and to finance a buy-back of the parent company’s shares: see Topic 16. 532 [9.1000]

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| TOPIC 9

The parties eventually agreed to a negotiated settlement. If the action had not been settled, the corporate veil (unless lifted by the court) would have prevented the employees making any claims for their entitlements against the stevedore company which held all the assets. The stevedore company, although part of the same group, was a separate legal entity to the company with which the employees had contracts. The position of employees of insolvent companies has caused much debate since the late 1990s. In February 2000 the Federal Government approved a national employee entitlement support scheme, funded by the government as a safety net to guarantee all employees a proportion of their entitlements lost as a result of an employer’s insolvency. GEERS, the General Employee Entitlements and Redundancy Scheme (see http://www.deewr.gov.au) is the present administrative solution and it is the current government’s policy to legislate this scheme. The bill known as the Fair Entitlements Guarantee Bill 2012 (Cth) is scheduled to be debated in the Federal Parliament in 2012. The Corporations Law Amendment (Employee Entitlements) Act 2000 (Cth) increased the protection for employee entitlements in two ways: • it extended the existing duty of directors to ensure that the company does not engage in insolvent trading to include entering into an uncommercial transaction (s 588G(1A) (see Topics 13 and 19)); and • it introduced a new offence prohibiting agreements or transactions entered into for the purpose of avoiding payment of employee entitlements: Pt 5.8A. However, to date there is no record of the offence being prosecuted. There have been attempts by the non-government parties in the Senate to make more wide-ranging amendments to the insolvent trading provisions, making companies liable in certain circumstances for all or part of the debts of “related bodies corporate”. These attempts were strongly opposed by the government and the business community and were rejected by the House of Representatives.

Conspiracy claim in the MUA case [9.1010] Another part of the dispute between Patrick Stevedores Group and the MUA was the action by the MUA against various parties associated with the Group and Peter Reith (the then Federal Minister of State for Workplace Relations and Small Business) for conspiracy: “by unlawful means – chiefly by conduct in contravention of s 298K(1) of [the Workplace Relations Act 1996 (Cth)] – to injure the employees”: Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (No 3) (1998) 195 CLR 1 at 24. As part of the negotiated settlement to the dispute, this action was discontinued by the MUA. However, it is interesting from a company law perspective to consider what the ramifications might have been had this conspiracy action been successful. Could the employees have then successfully argued that the court should lift the corporate veil? Could the transfer of assets that took place as part of the September “restructuring” be seen as part of the conspiracy/fraud, or perhaps as an attempt to avoid an existing legal obligation: see [4.90] (Yogaratnam)? It [9.1010] 533

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is interesting to note that the CASAC Report in 2000 (see [9.1020]) recommended against any changes to the existing principles of tort liability for corporate groups: see CASAC Report, Recommendation 14.

CASAC Report “Corporate Groups” [9.1020] The CASAC Report resulted from a comprehensive review of the application of Australian corporate law to corporate groups. It recommended that a single, uniform “control” test (see s 50AA) should replace the present “holding”, “subsidiary” and “related” company tests: see Recommendation 1. However, CASAC was against the introduction of a power for the court to order a company to contribute to the debts of related companies: see Recommendation 21. The Report also recommended that liquidators of group companies should be allowed to pool the unsecured assets and liabilities of two or more companies in liquidation with the prior approval of all the unsecured creditors: see Recommendation 22. Pooling arrangements were introduced into the Corporations Act by the Corporations Amendment (Insolvency) Act 2007 (Cth) for liquidations: Pt 5.6, Div 8. The arrangements were designed to improve pooling arrangements for corporate groups and can be achieved either voluntarily under s 574 or can be court ordered under s 579E. If pooling is court ordered a number of factors have to be satisfied under s 579E including that the order is “just and equitable”: s 579E(12); see also Topic 19.

Revision questions 1.

2.

Andy, Bob and Chris were old school friends. Bob and Chris were running a surf shop together. The business was having financial difficulties. Andy had recently inherited a lot of money and Bob and Chris asked him to lend the business $100,000 to enable them to buy sufficient stock for the summer season. Andy wanted to help his friends but also wanted to ensure that he would get his money back. He agreed to lend Bob and Chris the money in return for a payment of $10,000 per year out of the gross returns of the shop. The terms of the loan also provided that Bob and Chris would consult Andy about any major contracts entered into by the business and gave him a right to inspect the accounts at regular intervals. (a)

Discuss whether or not a partnership exists between Andy, Chris and Bob.

(b)

Would it make any difference if the terms of the loan provided for Andy to be paid $10,000 per year out of the profits of the business?

Quick and Smart are in partnership as public accountants. Smart entered into the following transactions in the name of the partnership without Quick's knowledge and without express authority to do so: (a)

534 [9.1020]

he purchased new stationery for the firm; and

Business Organisations

(b)

| TOPIC 9

he subscribed for $10,000 worth of shares in New Crown Mining expecting to make a quick profit when the company listed, but the float was a failure.

Discuss the liability of the partnership for these transactions. Explain when Quick may be personally liable for these transactions. 3.

Marcia is an entrepreneurial 17-year-old with a busy window cleaning business. She is studying for a commerce degree. She wants to incorporate her business. She wants to become an employee of the business so that she can be covered by workers' compensation and superannuation. She completes the registration documents for a proprietary company. She uses her own name as the sole director/ shareholder but falsifies her date of birth (showing she is 19 years old). ASIC subsequently registers the company, having no knowledge of the fraud. If the fraud were discovered what could ASIC do about the company?

4.

Now assume a slightly different scenario. Marcia does not register her company until she is over 18. She wants to call the company “Marcia's Guaranteed Sparkle Pty Ltd”. (a)

Will Marcia be able to register the company with this name? If so, how can she ensure that no one else uses it before her company is registered?

(b)

Is Marcia required to have a registered office? If so, can she use her parents' home address and, does the office have to be open to the public?

(c)

Does she have to display the company name and/or ACN/ABN • on her accounts? • outside her parents' house?

5.

Marcia has registered her company and it is trading profitably. After almost a year she decides to move to her own flat and moves the company's registered office to that address. A few days later the company receives an Annual Statement from ASIC which is forwarded from her parents' home address. How should Marcia respond to this statement?

[9.1020] 535

TOPIC 10 Internal Rules Principles........................................................................................ Sources of internal rules..................................................................... Statutory provisions .......................................................................... Constitution.................................................................................... Companies registered before 1 July 1998 .............................................. Effect of the constitution and replaceable rules ....................................... Alteration of the constitution and replaceable rules ................................. Objects clauses and limitations on powers............................................. Enforcement of the constitution and rules .............................................

[10.10] [10.20] [10.30] [10.90] [10.110] [10.150] [10.160] [10.210] [10.250]

Extract from J Yogaratnam and L Xynas, Corporations Law: In Principle (10th ed, Lawbook Co., 2017), Chapter 5.

Aim At the end of this Topic you should know: • what a company’s constitution may contain and its importance; • what replaceable rules are, where to find them and when they apply; • that under s 140(1), the constitution and any replaceable rules have effect as a contract between the company, its officers and members; and • how the constitution and replaceable rules can be enforced and altered.

PRINCIPLES [10.10] The internal rules of a company govern its various “internal” relationships between the company (as a separate legal entity) and its two main constituents – its members and officers. The Corporations Act 2001 (Cth) (Corporations Act) also has provisions that affect these “internal” relations, but to a large extent a company can adopt a “personalised” set of rules for its particular circumstances. For example, contrast what internal rules would be appropriate for a small family company that has only a few members, all of whom are closely involved in the day-to-day running of the company (like informally appointing a replacement director), with the rules that would be appropriate for a large public company that has many members and different classes of shares.

[10.10] 537

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Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act) [10.12] Part 3–2—Rules dealing with the internal governance of corporations, in particular, Divisions 57, 60, 63, 66, 69 and 72 of the CATSI Act are provisions on internal rules of Indigenous corporations.

In order to encourage members to learn about the rules of incorporation, ORIC prepared a condensed rule book. It is expected that this condensed rule book will assist corporations registered or groups seeking to register under the CATSI Act to develop their own a rule book. ORIC has cautioned that corporations adopting these rules should be aware that the laws in the CATSI Act still apply to them and that the CATSI Act will apply in default if the rules set out by corporations do not follow the CATSI Act. The condensed rule can be found at: book http://oric.gov.au/free-templates/ rule-book-templates.

Sources of internal rules [10.20] The internal rules of a company can be comprised of: • a constitution that the company has adopted (if one has been adopted on or after registration); • the replaceable rules in the Corporations Act; or • a combination of both: s 134. If a company adopts a constitution, it can be modified from time to time by special resolutions approved by the members of the company. A special resolution must be passed by at least 75% of the votes cast by members entitled to vote on the resolution: s 9. Any such special resolutions also form part of the internal rules of the company. The source of the rules applying to a particular company will depend on two factors: • the type of company; and • whether the company was registered before or after 1 July 1998. The latter distinction is a consequence of substantive reforms introduced by the Company Law Review Act 1998 (Cth) which came into effect on 1 July 1998. 538 [10.12]

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| TOPIC 10

Because companies registered prior to 1 July 1998 can continue with their existing internal rules, it is important to have at least a basic understanding of the sources of internal rules (and the related terminology) under the pre-1 July 1998 regime: see [10.110]–[10.140]. However, our major emphasis is on the current regime.

Statutory provisions [10.30] The relevant statutory provisions are ss 134 – 136. SECTIONS 134-136 134 Internal management of companies A company’s internal management may be governed by provisions of this Act that apply to the company as replaceable rules, by a constitution or by a combination of both. Note: There are additional rules about internal management in ordinary provisions of this Act and also in the common law. 135 Replaceable rules Companies to which replaceable rules apply (1)

A section or subsection (except subsection 129(1), this section and sections 140 and 141) whose heading contains the words: (a)

(b)

replaceable rule – applies as a replaceable rule to: (i)

each company that is or was registered after 1 July 1998; and

(ii)

any company registered before 1 July 1998 that repeals or repealed its constitution after that day; and

replaceable rule for proprietary companies and mandatory rule for public companies – applies: (i)

as a replaceable rule to any proprietary company that is or was registered after 1 July 1998; and

(ii)

as a replaceable rule to any company that is or [was] registered after 1 July 1998 and that changes or changed to a proprietary company (but only while it is a proprietary company); and

(iii)

as a replaceable rule to any proprietary company that is or was registered before 1 July 1998 that repeals or repealed its constitution after that day; and

(iv)

as an ordinary provision of this Act to any public company whenever registered. [10.30] 539

Business and Corporate Law

The section or subsection does not apply to a proprietary company while the same person is both its sole director and sole shareholder. Note 1: See sections 198E, 201F and 202C for the special provisions that apply to a proprietary company while the same person is both its sole director and sole shareholder. Note 2: A company may include in its constitution (by reference or otherwise) a replaceable rule that does not otherwise apply to it. [Editor’s Note: there is a typographical drafting error in s 135(1)(b)(ii). Currently, the text reads “is or eas registered”.] Company’s constitution can displace or modify replaceable rules (2)

A provision of a section or subsection that applies to a company as a replaceable rule can be displaced or modified by the company’s constitution.

Failure to comply with replaceable rules (3)

A failure to comply with the replaceable rules as they apply to a company is not of itself a contravention of this Act (so the provisions about criminal liability, civil liability and injunctions do not apply). Note: Replaceable rules that apply to a company have effect as a contract (see section 140).

136 Constitution of a company (1)

A company adopts a constitution: (a)

on registration – if each person specified in the application for the company’s registration as a person who consents to become a member agrees in writing to the terms of a constitution before the application is lodged; or

after registration – if the company passes a special resolution adopting a constitution or a court order is made under section 233 that requires the company to adopt the constitution. [Note to this subsection not extracted.]

(b)

(2)

The company may modify or repeal its constitution, or a provision of its constitution, by special resolution. Note: The company may need leave of the Court to modify or repeal its constitution if it was adopted as the result of a Court order (see subsection 233(3)).

(3)

540 [10.30]

The company’s constitution may provide that the special resolution does not have any effect unless a further requirement specified in the constitution relating to that modification or repeal has been complied with.

Internal Rules

(4)

| TOPIC 10

Unless the constitution provides otherwise, the company may modify or repeal a further requirement described in subsection (3) only if the further requirement is itself complied with. [subsections (5) and (6) not extracted.]

Evidence on compliance with s 136(1) of the Corporations Act [10.35] In Supercar International Holdings Ltd v Sommers; Tinkler Group Holdings Pty Ltd v Sommers [2011] NSWSC 336, questions were raised as to whether there was evidence that the constitution had been adopted pursuant to s 136(1) of the Corporations Act where a document was produced and purported to be the company constitution. White J observed on the facts that the ASIC company extract specified that the company was bound by the constitution “which would only be the case if s 136 has been complied with”″ (at [103]). White J concluded that the ASIC company extract is prima facie evidence that the constitution was adopted and thereby adopted in a manner contemplated by s 136 of the Corporations Act. The importance of compliance with s 136 was reiterated in Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd [2014] NSWCA 326. The court held that a company does not have a constitution unless s 136 of the Corporations Act has been complied with.

Replaceable rules [10.40] The relevant sections of the Corporations Act are described generally as the “replaceable rules”. These sections deal with internal matters such as the appointment and removal of directors, convening and conduct of meetings and share transfers. These replaceable rules operate as a series of “default provisions” – that is, the replaceable rule applies “in default” of the members adopting a constitution that provides for a different rule. It is intended that the replaceable rules will be updated from time to time by amending these sections of the Corporations Act to reflect current “best practice”. Any updates will automatically amend the internal rules of a company relying on the replaceable rules, saving the company the expense of keeping its constitution up to date with the Corporations Act. The table contained in s 141 (extracted below) cross-references the relevant sections. Each rule appears under the relevant topic: for example, the replaceable rule for the appointment of directors is with the other sections on directors (in Ch 2D Officers and Employees).

[10.40] 541

Business and Corporate Law

[10.50] Replaceable rules – Table based on s 141 Description of provision Directors Company may appoint a director Alternate directors Directors may appoint other directors Powers of directors Executing negotiable instruments Managing director Proprietary company may remove director Director may resign by giving written notice to company Voting and completion of transactions by interested director of proprietary company Remuneration of directors Directors’ meetings Circulating resolutions Calling directors’ meetings Chairing directors’ meetings Quorum at directors’ meetings Passing of directors’ resolutions Meetings of members Calling of meetings of members by a director Notice to joint members When notice by post or fax is given When notice under s 249J(3)(cb) is given Notice of adjourned meetings Quorum Chairing meetings of members Business at adjourned meetings Who can appoint a proxy Proxy vote valid even if member dies, revokes appointment etc How many votes a member has Jointly held shares Objection to right to vote How voting is carried out When and how polls must be taken Company secretary Terms of office determined by directors Inspection of books Company or directors may allow member to inspect books Shares Pre-emption for existing shareholders on issue of shares in proprietary company Other provisions about paying dividends Dividend rights for shares in proprietary companies Transfer of shares Transmission of shares on death Transmission of shares on bankruptcy

542 [10.50]

Section 201G 201K 201H 198A 198B 198C, 201J, 203F 203C# 203A 194# 202A 248A 248C 248E 248F 248G 249C 249J(2) 249J(4) 249J(5) 249M 249T 249U 249W(2) 249X* 250C(2) 250E 250F 250G 250J 250M 204F 247D 254D# 254U 254W(2)# 1072A 1072B

Internal Rules

Description of provision Transmission of shares on mental incapacity Registration of transfers Additional general discretion for directors of proprietary companies to refuse to register transfers #Replaceable rule that only applies to a proprietary company *Mandatory rule for public companies

| TOPIC 10

Section 1072D 1072F 1072G#

When replaceable rules apply [10.60] The replaceable rules apply to every company registered after 1 July 1998 unless the members opt out of them by adopting a constitution. They also apply to pre-1998 companies that repeal their entire existing internal rules (memorandum and articles) and do not adopt a new constitution.

Companies that must have a constitution [10.70] Certain types of companies must have their own constitution because of requirements in other sections of the Corporations Act and/or in the ASX Listing Rules. The following types of companies cannot rely solely on the replaceable rules: • no liability companies; • companies limited by guarantee that want to be registered without the word “limited” in their name; and • public companies listed on the ASX. Also, the replaceable rules do not apply to a proprietary company that has the same person as its sole director and sole shareholder: s 135(1), see [5.30] (Yogaratnam). Other companies may, because of their particular circumstances, choose to adopt a constitution. In this situation, a company can either adopt a constitution that entirely replaces the replaceable rules, or adopt a constitution that modifies or supplements the replaceable rules. Further, the constitution can itself be made up of a series of special resolutions passed by the members (s 136(2)), rather than a single document. A public company must lodge a copy with ASIC of any such special resolutions together with a copy of the amended constitution (s 136(5)), but this is not required of a proprietary company.

Different replaceable rules – public vs proprietary [10.80] In some instances, the replaceable rules distinguish between proprietary and public companies. Some replaceable rules only apply to proprietary companies – s 254D (pre-emption rights for existing shareholders), s 254W(2) (dividend rights) and s 1072G (additional discretion for directors to refuse to register transfers of shares). The heading to the relevant section states that the replaceable rule applies only to shares in proprietary companies. [10.80] 543

Business and Corporate Law

For public companies, some of the replaceable rules are mandatory – that is, the rule can be displaced by a proprietary company but not by a public company. In this case, the heading to the relevant section states “replaceable rule for proprietary companies and mandatory rule for public companies”. As at June 2012, the only such rule is s 249X, appointment of proxies.

Constitution [10.90] The constitution of a company can be a very important business planning tool. It enables the various stakeholders to “personalise” the company’s structure to suit their particular needs. For example, consider the needs of the members of a group who have come together to establish a company for a new venture. They may want weighted voting rights (to reflect the different contribution made by each party) in order to give these holders more influence, but it may also be important to retain certain safeguards for the party with the minority vote. Not all of the replaceable rules may be appropriate for the new company. The type of specialised provisions that could be considered for the constitution of such a company would include: • different classes of shares for the different types of participant; • different voting rights for the different classes of shares; and • provision for certain key decisions (for example, to dissolve the company or to make any large acquisitions) to be passed by a majority of each class. In addition to those companies that must have their own constitution (see [10.70]), the following are examples of situations where a constitution would generally be adopted: • a company with different classes of shares with different voting rights; • an “incorporated partnership” where partners transfer an existing business to a company but intend to each continue to take an active part in its management, as in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 extracted in Chapter 14 (Yogaratnam) at [14.610]; • a foreign company (that is, incorporated outside Australia); and • a company that intends to or has issued partly paid shares. A sample constitution is provided at the end of this Topic.

Single director/shareholder proprietary companies [10.100] As mentioned at [10.30], the replaceable rules do not apply to a proprietary company with a single shareholder who is also the sole director. The concept of rules for internal management is largely redundant for these companies. If at any time another director is appointed and/or anyone else becomes a shareholder, the replaceable rules will (in the absence of the members adopting a constitution) automatically apply to the company: s 135(1). While there is a single director/shareholder, all the decision-making power rests with that person: s 198E(1) extracted in Chapter 6 at [6.60] (Yogaratnam). 544 [10.90]

Internal Rules

| TOPIC 10

Section 198E is not a replaceable rule. Although a single director/ shareholder company can have a constitution, the effect of s 198E cannot be modified.

Companies registered before 1 July 1998 [10.110] Prior to 1 July 1998, a company’s internal rules comprised two documents: (a)

the memorandum of association; and

(b)

the articles of association.

Memorandum of association [10.120] Before companies were given full legal capacity (see now s 124), the memorandum of association was an important document that set out a company’s objects and powers, its name and share capital and the liability for members. The Company Law Review Act 1998 (Cth) abolished the memorandum of association. The basic information it contained is included in the company’s registration application and can be ascertained from a company search. Any objects or restrictions on powers that may still be required (for example, because the company is a no liability company (s 112(2)(b))) can be included in the company’s constitution.

Articles of association [10.130] Every company was also required to have articles of association. These set out the internal rules that would now be covered by the replaceable rules or a constitution. While every company had to have articles, companies limited by shares and no liability companies did not have to register them by lodging the articles with the ASC (now ASIC). If these companies did not register articles, the default provisions in what were formerly Table A or Table B of the First Schedule to the Corporations Law (in force prior to 1 July 1998 and before that in Sch 3 of the Companies Code 1981 (Cth)) were deemed to apply. A company limited by guarantee and an unlimited company had to register articles. Table A was used by proprietary companies and many companies chose it as the basis of their articles of association, often changing just one or two clauses.

Impact of the 1998 reforms [10.140] The memorandum and articles of a company registered prior to 1 July 1998 are taken together to be the “constitution” of that company: see former s 1415 (the effect of this section is continued by Corporations Act, Pt 10.1). Any modifications made to this constitution will be regarded as an amendment to the existing arrangement. The replaceable rules will only apply to these companies if and when they repeal their entire memorandum and articles: s 135(1). If this happens, a company will be in the same position as a company registered after 1 July 1998 and can then adopt all or some of the replaceable rules: see [5.40] (Yogaratnam). [10.140] 545

Business and Corporate Law

Consequently, although repealed, Tables A and B continue to be relevant for companies that have not repealed their entire existing memorandum and articles, in deciding pre-1 July 1998 issues. Both Tables can be found in later parts of printed companies legislation that applied at the time (and are still available in law libraries). It can be difficult to ascertain whether any post-1 July 1998 changes have occurred to the internal rules of a proprietary company because, unlike public companies, proprietary companies do not have to lodge copies of any special resolutions that adopt, modify or repeal their constitution: s 136(5). This means that it can be a complex exercise to work out what internal rules apply. It is difficult for someone who is not a member to obtain a copy of any constitution.

Effect of the constitution and replaceable rules [10.150] Under s 140(1) the constitution (if any) and any replaceable rules that apply to the company are to “have effect as a contract”. This contract is between: • each member and the company; • the company and each director and company secretary; and • the members themselves. The statutory contract created by this section is different from other contracts in that: • the remedies available for breach are generally limited to a declaration or an injunction, not damages; • the parties (members, directors and company secretary) are bound whether or not they agreed to the terms of the contract (for example, a person who was not a member when the company was formed or the constitution was adopted will still be bound by its terms); • it can be modified without the consent of every party to it (see [10.160]–[10.190] and NRMA Ltd v Snodgrass (2001) 37 ACSR 382); • it is a written contract notwithstanding that each party does not sign a copy of it; and • no consideration has been given. The contract only exists because the Corporations Act states that the constitution and replaceable rules bind the parties as if they had entered into a contract: s 140. Cases have considered whether rules or by-laws made pursuant to, or referred to in, the company’s constitution also form part of this statutory contract so that they can be enforced by or against a member. See, for example, Wilcox v Kogarah Golf Club (1995) 14 ACLC 421.

546 [10.150]

Internal Rules

| TOPIC 10

Alteration of the constitution and replaceable rules Alteration of the constitution [10.160] A company has power under s 136(2) to alter its constitution: see [10.30]. Alteration includes insertion and deletion of provisions as well as amendments. Any alteration has to be by special resolution (that is, approved by a 75% majority of members who are entitled to and cast a vote on the resolution: s 9 and see [11.270]). For public companies there is a requirement to lodge with ASIC a copy of a special resolution and constitution if it displaces a replaceable rule or modifies the constitution within 14 days of the resolution and to fail to do so is an offence of strict liability: 5 penalty units.

Effective date of alteration [10.170] Section 137 provides that a special resolution making any alteration to a constitution comes into effect on the date the resolution is passed or any later date specified in, or determined according to, the resolution. Where the constitution itself requires any repeal or modification to satisfy an additional requirement, the special resolution does not take effect until that additional requirement is complied with: s 136(3), see [10.30]. For example, the constitution may provide that it can only be altered with the written consent of a particular person.

Displacing or modifying the replaceable rules [10.180] Section 135(2) (see [10.30]) provides that the replaceable rules can be displaced or modified if the company adopts a constitution that has the effect of displacing or modifying a particular replaceable rule. The constitution may expressly displace any replaceable rule, or could displace it by inference. For example, a provision in a proprietary company’s constitution that provides that directors can only be removed by a special resolution of members would, by inference, displace the replaceable rule in s 203C(a). It is therefore possible to say that the replaceable rules can also be displaced or modified by a special resolution. That is, the procedure is the same for an alteration of a company’s constitution and a displacement/modification of the replaceable rules – a special resolution of members is required for both.

Limits to alteration of internal rules Statutory limits [10.190] There are some statutory limits on the power to alter the internal rules of a company. The modification: • cannot, unless a member gives written consent, require that member to – take up more shares – increase their liability to the company [10.190] 547

Business and Corporate Law

– impose (or increase) restrictions on the right to transfer their shares, unless the modification is connected with the company’s change from a public company to a proprietary company or the insertion of proportional takeover approval provisions (s 140(2), see also Austin J’s explanation of the operation of this subsection in Ding v Sylvania Waterways Ltd (1999) 46 NSWLR 424); • must comply with any further requirement in the company’s constitution (for example, that the consent of a particular person or statutory authority be obtained) (s 136(3) – (4)); • cannot, if it is a provision which deals with special rights of members, be altered except by means of the procedure laid down in Pt 2F.2 (see Chapter 17 (Yogaratnam)); and • cannot be oppressive: Pt 2F.1; see Chapter 14 (Yogaratnam).

General law limits [10.200] General law also has an important role to play here. In Gambotto v WCP Ltd (1995) 182 CLR 432 the High Court provided important new guidelines by which to assess amendments. If an alteration involves the removal of an important membership right (such as voting rights or dividend rights), or means that the shares of a member or any group of members are to be acquired without that member’s consent, then the tests of fairness laid down in Gambotto’s case must be satisfied: see [14.130] (Yogaratnam). Cases have also protected the role of directors and so attempts to change the constitution to provide that directors will take directions from members and thereby be forced to not consider the best interests of the company: See Capricornia Credit Union Ltd v ASIC [2007] FCAFC 112. In Vermillion Resources Pty Ltd v Gibbins Investments Pty Ltd [2011] FCAFC 149, it was observed that the Duomatic principle (Re Duomatic Ltd [1969] 2 Ch 365) can only operate where shareholders acting in concert are actually aware of any waiver or destruction of rights. The shareholders voted that the parties of two companies would not be bound by the provisions under a specific article of its Constitution. However, the doctrine only applies where shareholders “all agree, with full knowledge, effectively to depart from the company’s articles or Constitution so as to allow the company to proceed in a manner that could have been authorised by a resolution passed in a general meeting of the company.” However, in this case, the shareholders were unaware of certain facts therefore the doctrine did not apply.

Objects clauses and limitations on powers [10.210] Section 124 confers on a company the legal capacity and powers of an individual and also all the powers of a “body corporate”. Some of the powers peculiar to a “body corporate” are listed in s 124(1)(a) – (h), including the power to issue shares and the power to give a circulating security interest: see Topic 15. 548 [10.200]

Internal Rules

| TOPIC 10

If a company has a constitution, it can limit its powers by stating an express restriction on, or prohibition of, the exercise of any of its powers: s 125(1). SECTION 125 Constitution may limit powers and set out objects (1)

If a company has a constitution, it may contain an express restriction on, or a prohibition of, the company’s exercise of any of its powers. The exercise of a power by the company is not invalid merely because it is contrary to an express restriction or prohibition in the company’s constitution.

(2)

If a company has a constitution, it may set out the company’s objects. An act of the company is not invalid merely because it is contrary to or beyond any objects in the company’s constitution.

For example, it would be possible for a company’s constitution to restrict its power to borrow in some way. A company can also set out objects (or purposes) in its constitution: s 125(2). As mentioned at [10.120], this used to be the function of the memorandum of association. The cases on interpretation of these objects/powers clauses will continue to be relevant for any company that has these clauses in its constitution. However, it is clear from ss 124(2) and 125 that a company’s legal capacity to act is not affected merely because that act is not in its interests, or is in breach of its constitution. For example, the right of an innocent outsider to enforce a contract will not be affected simply because of these factors: see [10.250] and Topic 11. Five main types of companies will still have constitutions setting out objects or restricting the company’s powers: 1.

not-for-profit organisations that have incorporated under the Corporations Act (whether because of size or national coverage), particularly those not-for-profit organisations that seek to be registered without the word “limited” in their name as provided for by ss 150 – 151 and/or those required to have such objects under other legislation (such as taxation);

2.

joint venture companies – where the parties have come to together to form a new company which is only to exist for a specified purpose;

3.

no liability companies – s 112(2)(b) requires a no liability company to have a constitution which states that its “sole objects are mining purposes”;

4.

various professional practices – often statutory or membership requirements provide that these practices can only incorporate subject to certain additional requirements: see, for example, Pt 2.7 of the Legal Profession Act 2004 (Vic). These companies may have to include certain objects or restrictions in their constitutions; and [10.210] 549

Business and Corporate Law

5.

companies that were registered prior to 1998 and have not altered their memorandum – these companies can, by a special resolution of members, repeal their memorandum.

Abolition of general law doctrine of ultra vires [10.220] Where a company has a constitution that includes an objects clause, the company’s powers are limited to the purposes stated in it – that is, it cannot act outside the powers it is given in its constitution. Under the general law, if a company with objects (or restrictions on the use of its powers) acts outside the powers set out in its constitution, those acts are said to be “ultra vires” (outside the power) and any ultra vires acts are void. However, s 125 abolishes this doctrine and provides that no act that is beyond any object, or contrary to any express prohibition in the company’s constitution, is invalid merely for that reason: see [10.210]. Thus, outsiders dealing with the company are safe from any claim that an act by the company is void simply because it is ultra vires: see Topic 11. Note: The terminology can be confusing. Sometimes the expression “ultra vires” is used in a wider sense to describe unauthorised actions of directors (for example, a director who has acted without the necessary authority of the board of directors) or for situations where there is an abuse of power by directors or members. We use the expression in its strict sense, that is, beyond corporate capacity: see Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279 at 367 where the Full Court of the Victorian Supreme Court makes this distinction.

Ultra vires doctrine conclusions Companies without stated objects or restrictions on powers

[10.230] If a company’s constitution has no stated objects or restrictions on powers, the accepted view is that no question of ultra vires can arise. This is because these companies have the legal capacity and powers of an individual, plus any special powers given to them under the Corporations Act: s 124. Companies with stated objects or restrictions on powers

[10.240] If a company’s constitution does include an objects clause or restricts the company’s powers, two issues arise. First, it is necessary to decide whether a particular act complies with any restrictions in the constitution. For example, if the company’s objects include the conduct of research about the causes of heart-related deaths, does this include the conducting of trials of a new drug which may help prevent heart disease? The court has to examine the stated objects (or prohibitions) to see whether what the company has done falls within its powers or not. Often it is not an easy matter to decide, and depends on the court’s construction of the relevant clauses and their context. Then, if the court decides that an act is outside the express objects of the company or breaches a restriction on its powers, it is necessary to consider the 550 [10.220]

Internal Rules

| TOPIC 10

possible consequences. The act will not be invalid, but may be asserted in certain proceedings under the Corporations Act: see [10.250].

Enforcement of the constitution and rules [10.250] A breach of a provision in a company’s constitution is not a contravention of the Corporations Act – in other words, it is not an offence which could lead to the imposition of criminal or civil liability or the granting of a statutory injunction under s 1324. Nor is a breach of a replaceable rule of itself a contravention of the Corporations Act: s 135(3) (see [10.30]). It seems, therefore, that the statements made about the enforcement of the constitution apply equally to the enforcement of the replaceable rules. Thus, while it is s 140(2) that provides that the constitution and replaceable rules form a “contract” between the company and members, it is the general law that enables the company to enforce that statutory contract. Under general law principles, there is little doubt that the company can force members to comply with its constitution: Hickman v Kent or Romney Marsh Sheep-Breeders’ Association [1915] 1 Ch 881. Does the reverse apply? Suppose a provision in the constitution is breached by one director, several directors or any member or members. Can an individual member or group of members bring an action to enforce the provision? (In other words, can any member or group annoyed by the breach bring, in effect, a breach of contract suit?) In Bailey v New South Wales Medical Defence Union Ltd (1995) 184 CLR 399, the High Court said that special facts enabled the member to enforce the terms of the constitution that existed on the date on which he was sued by an outsider, even though subsequent amendments to it meant that he would no longer have had the same protection under the constitution. The special facts of Bailey’s case aside, there is no clear-cut answer to this question: see further discussion at [14.240] (Yogaratnam). Essentially, the court has to weigh up the rights of members to enforce their “contract” against the rights of the majority to excuse a breach. However, it is quite clear that outsiders (non-members) cannot obtain rights under the constitution nor can they enforce them, unless those non-members are directors or the company secretary. It would also seem that members can enforce only those provisions which affect them in their capacity as members – s 140(1) states “so far as they apply to that person”.

Consequences of a breach of objects clause or limitation on powers clause [10.260] A breach of an objects clause, or a restriction on powers clause is not of itself a contravention of the Corporations Act and will be treated in the same way as any other breach of the company’s constitution. However, a breach of such a provision of the constitution may still be asserted in other actions under the Corporations Act, such as: [10.260] 551

Business and Corporate Law

• an action against a director or other officer for breach of duty under Pt 2D.1 (see Chapters 11, 12 and 13 (Yogaratnam)); • an action for oppression under Pt 2F.1 (see Chapter 14 (Yogaratnam)); and • a winding up application under s 461(1)(k): see Topic 19. A statutory injunction is not available for a breach of the internal rules unless the breach also amounts to a contravention of the provisions mentioned above. It is not clear whether a member can use the statutory derivative action to obtain a general law injunction to prevent execution of a contract that would otherwise be in breach of stated objects or restrictions on powers. But it is clear that a completed transaction will be valid despite non-compliance with the stated objects or restrictions on powers. If a member could show that a breach of the constitution had caused them to suffer loss that was not a loss suffered by the company then it is possible that they can receive damages: see McLaughlin v Dungowan Manly Pty Ltd [2010] NSWSC 187. There is still some debate about whether directors can be personally liable for losses suffered by the company as a result of the directors allowing the company to act outside its objects or in breach of restrictions on its powers.

Further Reading Baxt R “Giving the Articles of Association their Legal Effect: Some Interesting Comments from the High Court of Australia” (1996) 24 ABLR 154 Lipton P, Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, Ch 4 Sample Company Constitution CORPORATIONS ACT COMPANY LIMITED BY SHARES CONSTITUTION OF ACME PTY LIMITED (ACN 059 345 876) 1.

The name of the Company is Acme Pty Ltd.

2.

The Company is a proprietary company limited by shares.

552 [10.260]

Internal Rules

3.

| TOPIC 10

The replaceable rules in the Corporations Act apply to the Company except: (a)

to the extent they are expressly excluded by this Constitution; and

(b)

while the Company has a sole member who is the same person as its sole director.

4.

The replaceable rules in sections 201G, 201H, 203C and 254D of the Corporations Act are excluded.

5.

If there is only one director, references to “the directors” in this Constitution will be a reference to that director.

6.

7.

(a)

The holder or holders of a majority of the issued shares of the Company conferring the right to vote at general meetings of the Company may appoint any person to be a director to fill a casual vacancy or as an addition to the existing directors or remove a director from office.

(b)

The directors may appoint any person to be a director to fill a casual vacancy or as an addition to the existing directors.

(c)

Any appointment or removal under paragraph (a) must be in writing signed by or on behalf of the holder or holders of a majority of the issued shares of the Company conferring the right to vote at general meetings of the Company. Any appointment or removal will take effect immediately on delivery of the instrument of appointment or removal to the registered office of the Company.

(d)

A director is entitled to attend and be heard at general meetings despite the fact that the director does not hold any shares in the Company.

(e)

A director holds office subject only to paragraph (a) but the office of the director is vacated if the director: (i)

ceases to be a director by virtue of the Corporations Act;

(ii)

becomes bankrupt or makes any arrangement or composition with the director’s creditors generally;

(iii)

becomes prohibited from being a director by reason of any order under the Corporations Act;

(iv)

becomes of unsound mind or a person whose person or estate is liable to be dealt with in any way under the laws relating to mental health; or

(v)

resigns under section 203A of the Corporations Act.

If the Company has a common seal: (a)

the directors must provide for the safe custody of the seal; and [10.260] 553

Business and Corporate Law

(b)

8.

the seal may be used only by the authority of the directors (or of a committee of the directors authorised by the directors to authorise the use of the seal) and each document to which the seal is fixed must be signed by: (i)

two directors; or

(ii)

a director and a company secretary; or

(iii)

if the Company has a sole director who is also a sole company secretary, that director.

A director may hold any other office or place of profit under the Company (except that of auditor) in conjunction with the office of director and on any terms the board of directors may approve. A director may be a director or member of, or hold any other office or place of profit under, any corporation promoted by the Company or in which it may be interested (whether as a vendor or shareholder or otherwise) and a director is not accountable for any benefits received as such a director, member or holder of office or place of profit.

9.

10.

(a)

If the Company is wound up, the liquidator may, with the sanction of a special resolution, divide among the members in kind the whole or any part of the property of the Company. For that purpose, the liquidator may set such value as the liquidator considers fair on any property to be so divided and may determine how the division is to be carried out as between the members or different classes of members.

(b)

The liquidator may, with the sanction of a special resolution, vest the whole or any part of the property of the Company in trustees on any trusts for the benefit of the members as the liquidator thinks fit, but so that no member is compelled to accept any shares or other securities in respect of which there is any liability.

Subject to and so far as permitted by the Act: (a)

554 [10.260]

The Company must to the extent that the person is not otherwise indemnified, indemnify every officer of the Company and its wholly-owned subsidiaries and may indemnify its auditor against a Liability incurred as such an officer or auditor to a person (other than the Company or a related body corporate) including a Liability incurred as a result of appointment or nomination by the Company or subsidiary as a trustee or as an officer of another corporation, unless the Liability arises out of conduct involving a lack of good faith; and

Internal Rules

| TOPIC 10

(b)

The Company may make a payment (whether by way of advance, loan or otherwise) in respect of legal costs incurred by an officer or employee or auditor in defending an action for a Liability incurred as such an officer, employee or auditor or in resisting or responding to actions taken by a government agency or a liquidator. In this rule, “Liability” means a liability of any kind (whether actual or contingent and whether fixed or unascertained) and includes costs, damages and expenses, including costs and expenses incurred in connection with any investigation or inquiry by a government agency or a liquidator.

(c)

The indemnity in favour of officers in this rule is a continuing indemnity. It applies in respect of all acts done by a person while an officer of the Company or one of its wholly-owned subsidiaries even though the person is not an officer at the time the claim is made.

(d)

Subject to the Act, the Company may enter into and pay premiums on, a contract of insurance in respect of any person.

(e)

Subject to the Act, without limiting a person’s rights under this rule, the Company may enter into an agreement with a person who is or has been an officer of the Company or any of the Company’s subsidiaries, to give effect to the rights of the person under this rule on any terms or conditions that the board of directors thinks fit.

[10.260] 555

TOPIC 11 Meetings Principles........................................................................................ Board meetings ............................................................................... Single director companies .................................................................. Members’ meetings .......................................................................... Single member companies ................................................................. Notice to members........................................................................... Resolutions ..................................................................................... Quorum at members’ meetings .......................................................... Conduct of members’ meetings .......................................................... Voting rights and procedures at members’ meetings ............................... Irregularities ....................................................................................

[11.10] [11.20] [11.40] [11.60] [10.190] [11.210] [11.240] [11.270] [11.280] [11.290] [11.320]

Extract from J Yogaratnam and L Xynas, Corporations Law: In Principle (10th ed, Lawbook Co., 2017), Chapter 10.

Aim At the end of this Topic you should know: • the procedures for meetings of the board of directors; • the types of members’ meetings, their purposes, and when and how they are called; • the types of resolutions and their legal requirements; • what is meant by a quorum and how it operates; and • how voting takes place.

PRINCIPLES [11.10] In solvent companies there are two important groups who hold meetings. Directors hold board meetings and members meet in general or class meetings. This Topic looks at the purpose of the meetings, the way in which they are convened, and their procedures. Part 2G of the Corporations Act 2001 (Cth) (Corporations Act) contains the provisions which relate to both directors’ meetings (Pt 2G.1) and members’ meetings (Pt 2G.2), including the relevant replaceable rules: see Topic 10. Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act) [11.12] Part 1-2 Division 6-20; Chapter 5—Meetings of the CATSI Act. Similar to Corporations Act 2001 (Cth), the CATSI Act has similar provisions on the company resolutions which include general meeting resolutions, special resolutions and circulating resolutions.

[11.12] 557

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A recent case where the Registrar of ORIC called for a general meeting for the members was in relation to the Yindjibarndi Aboriginal Corporation RNTBC (YAC). Extract from the ORIC’s website: http://www.oric.gov.au/publications/ media-release/registrar-calls-general-meeting-yindjibarndi.

MR1516-17 – Registrar calls general meeting for Yindjibarndi [11.14] The Registrar of Indigenous Corporations, Anthony Beven, has called a general meeting for the members of Yindjibarndi Aboriginal Corporation RNTBC (YAC). The Registrar’s decision follows the judgment handed down by Justice Le Miere in the Supreme Court of Western Australia on 9 March 2016. In Sandy v Yindjibarndi Aboriginal Corporation RNTBC Justice Le Miere found that the corporation does not currently have any directors. Justice Le Miere found that the corporation’s former directors’ terms expired at the annual general meeting (AGM) held on 30 November 2015. That meeting was unable to appoint new directors as no directors were able to secure the support of 75 per cent of the members as required by YAC’s rule book. Without directors the corporation has been unable to call a new meeting and hold another election for directors. The Registrar has therefore exercised his powers and called the meeting of the corporation’s members. The general meeting will be held on 19 April 2016 at the 50 Cent Hall in Roebourne (2 Sholl Street) and will be chaired by the Registrar. YAC holds and manages the native title interests of the Yindjibarndi people. The Registrar has also used his powers to amend the rule book of YAC to replace the requirement for resolutions (other than special resolutions) to be approved by 75 per cent of the voting members with the more usual requirement for only a majority of voting members. The Registrar has also proposed a number of other changes to YAC’s rule book and they will be put to a vote of the members at the meeting on 19 April 2016.

Board meetings [11.20] Meetings of directors can be very informal, but for a “meeting” to have taken place, the directors must show evidence that they have been given notice of the meeting and have concurred in any action taken: see Wilson v Manna Hill Mining Company Pty Ltd [2004] FCA 912. This “concurrence” can be by meeting together or, if the internal rules permit, by circulating a written resolution (sometimes referred to as “flying minutes”). Such a procedure is provided for by, for example, the replaceable rule in s 248A. With the authority of either the constitution or the replaceable rule in s 201K, a director may appoint a substitute (alternate) to act in her or his stead and they will attend meetings. This may be useful, for example, while a director is away on holidays. For public companies, the directors (in their 558 [11.14]

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annual report to members) must give details about the number of board meetings and any meetings of committees of the board held during the year and their attendance at those meetings: s 300(10). Proceedings of directors’ meetings are governed primarily by the internal rules, and also: • s 191, which requires a director of either a public or a proprietary company to give the other directors notice of any material personal interest in a matter relating to the affairs of the company (see Chapter 13 (Yogaratnam)); • s 195, which restricts the right of directors of public companies who have a material personal interest in a matter being considered by the board to be present or vote at the board meeting (see Chapter 13 (Yogaratnam)); • s 251A, which requires minute books to be kept and signed, recording proceedings and resolutions of directors’ meetings, resolutions passed by directors without a meeting and declarations made by the sole director of a proprietary company that has only one director; and • s 248D, which deals with the use of technology. SECTION 248D Use of technology A directors’ meeting may be called or held using any technology consented to by all the directors. The consent may be a standing one. A director may only withdraw their consent within a reasonable period before the meeting.

In the absence of a provision to the contrary in the internal rules, general law principles require that: • each director is entitled to notice of a board meeting even if they are overseas, provided they can be contacted; and • the notice does not need to specify what business is to be conducted.

Relevant replaceable rules [11.30] The relevant replaceable rules that apply (unless the company has adopted a constitution that provides otherwise) are: • s 248A – directors may pass a resolution without a directors’ meeting being held if all the directors entitled to vote on the resolution sign a document containing a statement that they are in favour of the resolution set out in the document (as long as the wording of the statement and the resolution is identical, directors may sign separate copies of the document); • s 248C – any director can call a directors’ meeting by giving reasonable notice to each of the other directors (the notice does not have to be in writing); • s 248E – the directors must elect a director to chair their meetings (referred to in the legislation as “the chair”);

[11.30] 559

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• s 248F – unless the directors determine otherwise, a quorum (the minimum number required to be present before the meeting can proceed) is two directors who must be present at all times during the meeting; and • s 248G – resolutions must be passed by a majority of directors entitled to vote on the resolution (any director prevented from voting on the particular resolution under, for example, s 195, is not included in the number required for a majority). If necessary, the chair has a casting vote.

Single director companies [11.40] In relation to single director proprietary companies, s 248B applies – this is not a replaceable rule. SECTION 248B Resolutions and declarations of 1 director proprietary companies Resolutions (1)

The director of a proprietary company that has only 1 director may pass a resolution by recording it and signing the record. Declarations

(2)

The director of a proprietary company that has only 1 director may make a declaration by recording it and signing the record. Recording and signing the declaration satisfies any requirement in this Act that the declaration be made at a directors’ meeting.

Note 1: For directors’ declarations, see ss 295 and 494. Note 2: Passage of a resolution or the making of a declaration under this section must be recorded in the company’s minute books (see s 251A).

The following flowchart is intended to provide an overview of the key provisions in relation to board meetings.

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Figure 11.1: Issues – directors’ meetings

Members' meetings [11.60] The provisions that relate to members’ meetings are contained in Pt 2G.2. There are three types of members’ meetings – the annual general meeting, general meetings and class meetings.

Annual general meeting (AGM) [11.70] Only public companies with more than one member must hold an AGM. For the first AGM, 18 months after registration is the timeframe allowed in which to hold the meeting: s 250N(1). Thereafter, the AGM must be held once every calendar year within five months of the end of the company’s financial year: s 250N. ASIC can extend this time and grant exemptions: ss 250P, 250PAA. Public companies with only one member are not required to hold an AGM: s 250N(4). A proprietary company may have a constitution requiring it to hold an AGM. In any event, an AGM would seem to be good practice for any [11.70] 561

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proprietary company that has members who do not participate in the trading operations. If a meeting is difficult to organise (for example, members are in different States), then s 249A (circulating members’ resolutions) or s 249S (use of technology at members’ meetings, see [11.280]) may assist.

Matters considered at an AGM [11.80] Section 250R(1) sets out the matters that may be considered by an AGM even if these matters are not referred to in the notice of meeting. These matters are considered to be the “ordinary business” of an AGM. SECTION 250R Business of AGM (1)

The business of an AGM may include any of the following, even if not referred to in the notice of meeting: (a)

the consideration of the annual financial report, directors’ report and auditor’s report;

(b)

the election of directors;

(c)

the appointment of the auditor;

(d)

the fixing of the auditor’s remuneration.

Advisory resolution for adoption of remuneration report (2)

At a listed company’s AGM, a resolution that the remuneration report be adopted must be put to the vote. Note: Under [paragraph] 249L(2)(a), the notice of the AGM must inform members that this resolution will be put at the AGM.

(3)

The vote on the resolution is advisory only and does not bind the directors or the company.

Background to reform in executives' remuneration and s 250R [11.85] Following the Global Financial Crisis in 2007-2008, there was concern over manipulation of remuneration by company directors and executives. The Productivity Commission was given the task in 2009 to undertake a public inquiry into the regulatory framework around remuneration of directors and executives of companies regulated under the Corporations Act. In particular, the Commission considered: • trends in director internationally;

and

executive

remuneration

in

Australia

and

• the effectiveness of the existing framework for the oversight, accountability and transparency of director and executive remuneration practices; 562 [11.80]

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• the role of institutional and retail shareholders in the development, setting, reporting and consideration of remuneration practices; • any mechanisms that would better align the interests of boards and executives with those of shareholders and the wider community; • the effectiveness of the international responses to remuneration issues arising from the global financial crisis (see http://www.pc.gov.au/inquiries/completed/executive-remuneration). The report by the Commission was released by the Australian Government in January 2010 found that further reforms were required on Australia’s remuneration framework, despite it being “highly ranked internationally”. Part of these measures related to the ability of shareholders to “control” remuneration of executives. Remuneration reports must be presented at the company’s AGM (s 250R) and this report must be put to the vote. If this vote receives a no vote of 25% or more, the first “strike” has been breached. The vote at this point is not binding. If, the following year, the remuneration report also receives no vote of more than 25% then a “spill motion” can be triggered. This allows the board of directors to be re-elected, if the shareholders so permit. If this bill resolution is passed by a majority of more than 50%, then a spill meeting, held within 90 days, will allow shareholders the opportunity to vote on the re-election of directors. The amendments also attempt to remove the ability of executives and related parties from voting on the remuneration report (s 250R(4)). It should be noted, that the chair is still able to exercise proxies as clarified in Corporations Amendment (Proxy Voting) Act 2012. The onus is on the directors of a public company to call the AGM and present the reports outlined in s 250R(1)(a): s 317. It is also common practice for directors’ remuneration to be considered at the AGM: for example, s 202A, a replaceable rule. All listed public companies must submit the remuneration report (setting out the remuneration to be paid to directors and the five highest paid company executives or senior managers) to the AGM and a resolution that this report be adopted must be voted on by the meeting: s 250R(2). The notice of meeting must inform members that this resolution will be put at the AGM: s 249L(2)(a) (extracted at [11.230]). Section 250SA (extracted at [11.90]) requires the chair to allow members a reasonable opportunity to ask questions about, or make comments on, the remuneration report. However, the vote on the remuneration report is only an advisory vote and does not bind the directors or the company: s 250R(3). The constitution may provide that other matters must be considered at the AGM – for example, if the company is a not-for-profit company limited by guarantee (which must be a public company), the constitution may provide for membership fees to be fixed at the AGM. Subject to certain notice requirements, it is also possible for members to propose resolutions to be considered: see [11.240]. [11.85] 563

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The notice of meeting need not refer to the matters outlined in s 250R(1) (“ordinary business”), but it must specify any other “special business”. An example can be found at http://www.aluminalimited.com/uploads/briefcase/ 2011/ASX%20announcement%202010-11%20Notice%20of%20Meeting.pdf.

Conduct and questions [11.90] The AGM gives members of a company an opportunity to ask the directors questions about the management of the company and, if the company’s auditor or a representative is present, a similar opportunity to ask questions about the audit and other relevant matters. Note ss 250S(1), 250SA and 250T(1): SECTIONS 250S(1), 250SA and 250T(1) 250S Questions and comments by members on company management at AGM (1)

The chair of an AGM must allow a reasonable opportunity for the members as a whole at the meeting to ask questions about or make comments on the management of the company. …

250SA Listed company – remuneration report At a listed company’s AGM, the chair must allow a reasonable opportunity for the members as a whole to ask questions about, or make comments on, the remuneration report. This section does not limit section 250S. 250T Questions by members of auditors at AGM (1)

If the company’s auditor or their representative is at the meeting, the chair of an AGM must: (a)

allow a reasonable opportunity for the members as a whole at the meeting to ask the auditor or the auditor’s representative questions relevant to: (i)

the conduct of the audit; and

(ii)

the preparation and content of the auditor’s report; and

(iii)

the accounting policies adopted by the company in relation to the preparation of the financial statements; and

(iv)

the independence of the auditor in relation to the conduct of the audit; and

allow a reasonable opportunity for the auditor or their representative to answer written questions submitted to the auditor under section 250PA. [Notes to these sections not extracted.] (b)

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The above subsections are strict liability offences and attract a penalty of 5 penalty units. In recent times hundreds, or even thousands, of shareholders have attended the AGMs of some large public companies when controversial proposals are being considered. Often the debate is heated and shareholders ask searching questions about the company’s policies and management, especially matters such as directors’ remuneration (see [11.85]) and financial statements. Section 250T was amended to increase the rights of shareholders to ask the auditor or their representative questions about auditing and accounting issues. The auditor of a listed public company or a suitably qualified representative of the audit team must attend the company’s AGM or face a penalty of 10 penalty units: s 250RA. Members of a listed company who are entitled to vote also have the right to submit written questions to the auditor about the content of the audit report or the conduct of the audit: s 250PA. The Australian Shareholders’ Association (ASA) and the Australian Institute of Company Directors issued a “Code of Best Practice” for the conduct of AGMs (September 1994). CASAC’s (now CAMAC) “Shareholder Participation in the Modern Listed Public Company: the Final Report”, which was published in June 2000 also made recommendations about calling and conducting general meetings. For more details see the Lipton-Herzberg website at http:// www.lipton-herzberg.com.au/law_reform.htm.

General meetings [11.100] Apart from the AGM, sometimes other general meetings will be held. In practice, these are usually referred to as “extraordinary” general meetings (although this term is not used in the Corporations Act).

Matters considered at general meetings [11.110] In most companies general management powers are vested in the board of directors. However, there are certain situations where powers are granted to the members in general meeting by the Corporations Act, the general law, the company’s internal rules or (if applicable) the ASX Listing Rules. These are discussed in more detail in Chapter 6 (Yogaratnam).

Who can call a general meeting? [11.120] General meetings of a company can be called by: • the board of directors; • a director – see the replaceable rule in s 249C, or, in the case of a listed company, s 249CA which is not a replaceable rule and applies despite anything in the constitution; • the board of directors on the written request of the members – s 249D (see [11.140]). See Woolworths Ltd v GetUp Ltd [2012] FCA 726; Mortimer v Proto Resources & Investments Ltd [2015] FCA 654; [11.120] 565

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• the members themselves – s 249F (see [11.150]); or • the court: s 249G (see [11.160]). See Northwest Capital Management v Westate Capital Ltd [2012] WASC 121. All members’ meetings must be held for a “proper purpose”: s 249Q and see Howard v Mechtler (1999) 17 ACLC 632; NRMA Ltd v Snodgrass (2001) 37 ACSR 382 (Windeyer J); NRMA Ltd v Snodgrass (2001) 52 NSWLR 383 (CA NSW); NRMA Ltd v Scandrett (2002) 171 FLR 232; and Bisan Ltd v Cellante (2002) 173 FLR 310. All members’ meetings must be held at a “reasonable time and place”: s 249R and see Coombs v Dynasty Pty Ltd (1994) 14 ACSR 60 extracted below. Case study Coombs v Dynasty Pty Ltd (1994) 14 ACSR 60; on appeal Dynasty Pty Ltd v Coombs (1995) 59 FCR 122 (Federal Court)

[11.130] FACTS: Coombs was a minority shareholder in a proprietary company controlled by the Thomas family. Over some years, the relationship between the shareholders broke down and Coombs eventually sought a remedy under the predecessor to Pt 2F.1: see Chapter 14 (Yogaratnam). One of his complaints concerned the holding of the 1991 annual general meeting. The company’s registered office was in the Northern Territory, but its 1991 annual general meeting was held on Christmas Eve at Hamilton Island on the Barrier Reef. Coombs lived in Alice Springs. DECISION: The court upheld his claim of oppression. As part of its decision, the court found that the holding of the 1991 meeting “at a time and place where members are unlikely to be able to attend is tantamount to not holding a meeting at all”: at 92. Note:The decision in Coombs was made on the basis of the general law which s 249R is regarded as enacting.

Directors call a general meeting at the request of the members [11.140] Section 249D allows members holding at least 5% of the voting shares or a minimum of 100 members (regardless of the number of shares they hold) to request the directors to call a general meeting. There was a failed attempt by the government in 2005-6 to change this by removal of the “100-member rule”, leaving the right of members with 5% of the votes to request the directors to call a meeting unchanged: see below. Note ss 249D – 249E: SECTIONS 249D-249E 249D Calling of general meeting by directors when requested by members (1)

The directors of a company must call and arrange to hold a general meeting on the request of: (a)

566 [11.130]

members with at least 5% of the votes that may be cast at the general meeting; or

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(b) (1A)

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at least 100 members who are entitled to vote at the general meeting.

The regulations may prescribe a different number of members for the purposes of the application of paragraph (1)(b) to: (a)

a particular company; or

(b)

a particular class of company.

Without limiting this, the regulations may specify the number as a percentage of the total number of members of the company. (2)

The request must: (a)

be in writing; and

(b)

state any resolution to be proposed at the meeting; and

(c)

be signed by the members making the request; and

(d)

be given to the company.

(3)-(4) … (5)

The directors must call the meeting within 21 days after the request is given to the company. The meeting is to be held not later than 2 months after the request is given to the company.

249E Failure of directors to call general meeting (1)

Members with more than 50% of the votes of all of the members who make a request under section 249D may call and arrange to hold a general meeting if the directors do not do so within 21 days after the request is given to the company.

(2)

The meeting must be called in the same way – so far as is possible – in which general meetings of the company may be called. The meeting must be held not later than 3 months after the request is given to the company.

(3)

To call the meeting the members requesting the meeting may ask the company under section 173 for a copy of the register of members. Despite paragraph 173(3)(b), the company must give the members the copy of the register without charge.

(4)

The company must pay the reasonable expenses the members incurred because the directors failed to call and arrange to hold the meeting.

(4A)

…

(5)

The company may recover the amount of the expenses from the directors. However, a director is not liable for the amount if they prove that they took all reasonable steps to cause the directors to comply with section 249D. The directors who are liable are jointly and individually liable for the amount. If a [11.140] 567

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director who is liable for the amount does not reimburse the company, the company must deduct the amount from any sum payable as fees to, or remuneration of, the director.

Some general points on member-convened meetings: • a request by a member under s 249D must be for a “bona fide” purpose not, for example, to harass the company and its directors (see Humes Ltd v Unity APA Ltd (No 1) [1987] VR 467; Re Ariadne Australia Ltd [1991] 2 Qd R 377; and s 249Q); • members cannot request a meeting where the purpose is to deal with a matter which is within the province of the directors (see NRMA v Parker (1986) 6 NSWLR 517); • however, members may request a meeting where the purpose is to propose an amendment to the constitution, which, if passed, would have the effect of restricting the directors’ powers (see NRMA Ltd v Snodgrass (2001) 37 ACSR 382 (Windeyer J); NRMA Ltd v Snodgrass (2001) 52 NSWLR 383 (CA NSW); NRMA v Parkin (2004) 49 ACSR 386 (Campbell J); NRMA v Parkin (2004) 60 NSWLR 224 (CA NSW)); and • a company’s constitution may allow a smaller number to request a meeting than under s 249D, but it cannot make it more difficult – in other words, s 249D is a minimum statutory right. There has been considerable controversy over s 249D(1), namely the number of members required to request the directors to convene a meeting. In recent years a small number of shareholders with small holdings in large public companies have successfully used the power in s 249D(1)(b) to force several public companies to hold extraordinary general meetings to consider certain environmental issues. Many of these shareholders held only one share in the company and together they represented only a tiny proportion of both shareholders and issued share capital, and the resolutions they proposed were overwhelmingly defeated. Similarly, dissident members of the NRMA (the motorists’ road service organisation in New South Wales) have also used s 249D(1) on numerous occasions to request the directors to call a general meeting to consider contentious issues, including proposed amendments to the NRMA’s constitution (see above) by adding provisions designed to protect the working conditions of the road service patrol employees and the appointment and removal of directors: see NRMA v Spragg (2001) 161 FLR 243; NRMA v Snodgrass (2002) 42 ACSR 371; NRMA v Bradley (2002) 42 ACSR 616; NRMA Ltd v Scandrett (2002) 171 FLR 232; NRMA v Parkin (2004) 49 ACSR 386 (Campbell J); NRMA v Parkin (2004) 60 NSWLR 224 (CA NSW); see also Turnbull v NRMA (2004) 186 FLR 360. In several of these cases, the NRMA applied successfully to the Supreme Court for an order under s 1322(4) (see 568 [11.140]

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[10.300] (Yogaratnam)) extending the time for the calling of the meeting so that the proposed resolutions could instead be considered at the company’s annual general meeting (so avoiding the estimated $1.4 million cost of holding an extraordinary general meeting): see NRMA v Spragg (2001) 161 FLR 243; NRMA v Snodgrass (2002) 42 ACSR 371; NRMA v Bradley (2002) 42 ACSR 616. However, a similar application was rejected by the Full Federal Court in Re NRMA Association Ltd [2003] FCAFC 206: see also ASIC v NRMA (2002) 43 ACSR 451; and DVT Holdings Ltd v Bigshop.com.au Ltd (2002) 42 ACSR 378. The use of s 249D has been a contentious issue. The desirability of allowing shareholders the right to bring their concerns to a meeting must be balanced against the fact that the holding of a shareholders’ meeting of a large, public company involves considerable cost to the company (and, indirectly, to the other shareholders). The 100 member rule has been criticised because it confers disproportionate influence on very small groups of shareholders by enabling them to require companies to hold special meetings on particular issues. It also fails to recognise substantial differences in the size of companies and it is out of step with comparative laws in other countries. Despite this there has been no change to the legislation as proposed in 2005.

Members call a general meeting [11.150] In addition to having the power to request the directors to call a general meeting, members holding at least 5% of the voting shares may also call a general meeting themselves. SECTION 249F Calling of general meetings by members (1)

Members with at least 5% of the votes that may be cast at a general meeting of the company may call, and arrange to hold, a general meeting. The members calling the meeting must pay the expenses of calling and holding the meeting.

(2)

The meeting must be called in the same way – so far as is possible – in which general meetings of the company may be called.

(3)

…

The main difference between a meeting called by the members under s 249F and a meeting requested by the members under s 249D, is that under s 249F, the members (rather than the company) must bear the costs associated with the meeting. In a company with a large number of members, these costs would be considerable and would operate as a major practical hurdle.

[11.150] 569

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Section s 249F is not a replaceable rule. The right of members with the requisite percentage of votes to call a meeting cannot be displaced by the majority adopting a constitution which provides otherwise. A Victorian case illustrates the difficulties which may arise in calculating the required percentage of voting power: see Bisan Ltd v Cellante (2002) 173 FLR 310. For the meaning of “call” see Beck v Tuckey Pty Ltd (2004) 49 ACSR 555 at [46] where it was suggested the word may refer to “the whole process of convening the meeting and bringing together the members”.

Court calls a general meeting [11.160] If there is no other way in which a meeting can be called, a director or a member who is entitled to vote may apply to the court for an order calling a meeting. Note s 249G: SECTION 249G Calling of meetings of members by the Court (1)

The Court may order a meeting of the company’s members to be called if it is impracticable to call the meeting in any other way.

(2)

The Court may make the order on application by: (a)

any director; or

(b)

any member who would be entitled to vote at the meeting.

Note: For the directions the Court may give for calling, holding or conducting a meeting it has ordered be called, see s 1319.

The court will require compelling reasons for it to exercise its discretion to call the meeting: see Beck v Tuckey Pty Ltd (2004) 49 ACSR 555; and Gratton v Carlton Football Club Ltd (2004) 187 FLR 25. Examples where the court has ordered such a meeting be called include Re Totex-Adon Pty Ltd [1980] 1 NSWLR 605 and Fiore v Carlton Football Club Ltd (2002) 21 ACLC 145. Another illustration is Re Noel Tedman Holdings Pty Ltd [1967] Qd R 561. Case study [11.170] Re Noel Tedman Holdings Pty Ltd [1967] Qd R 561 (Supreme Court of Queensland). FACTS: A husband and wife were the only shareholders and directors of a family company. They were both killed in a car accident. The company’s constitution provided that the directors had to approve any transfer of shares by a shareholder’s legal personal representative to the beneficiaries named in a will. The company had no directors and no members who could call a general

570 [11.160]

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meeting to elect directors. The legal personal representatives applied to the court for an order under the predecessor of s 249G convening a general meeting. DECISION: The Court made the order requested.

Class meetings [11.180] A class meeting is where a subset of the members meet. The subset will have certain rights in common – for example, if preference shares have been issued, the classes would be: (1) preference shareholders; and (2) ordinary shareholders. Where a company’s shares are divided into different classes, or there are different membership rights attached to different shares, the Corporations Act may require class meetings to be held. Examples are: any variation of existing class rights (Pt 2F.2; see Chapter 17 (Yogaratnam)); and schemes of arrangement (s 411). The general provisions about the conduct of members’ meetings (see [11.280]–[11.310]) will apply to class meetings unless the Corporations Act or the internal rules provide otherwise.

Single member companies [11.190] As with single director companies, single member companies can pass resolutions without holding a “meeting”. If the company is a single member and single director company, then it is possible to rely on both ss 248B (see [11.40]) and 249B. SECTION 249B Resolutions of 1 member companies (1)

A company that has only 1 member may pass a resolution by the member recording it and signing the record.

(2)

If this Act requires information or a document relating to the resolution to be lodged with ASIC, that requirement is satisfied by lodging the information or document with the resolution that is passed.

Note 1: A body corporate representative may sign such a resolution (see s 250D). Note 2: Passage of a resolution under this section must be recorded in the company’s minute books (see s 251A).

Thus, the distinction between ordinary and special resolutions (see [11.240]–[11.250]) and the requirements for notice, are not relevant to single member companies.

[11.190] 571

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Figure 11.2: Types of members’ meetings

Notice to members [11.210] Generally, at least 21 days’ notice of the meeting (or longer if required by the company’s constitution) must be given to the members unless all the members (for an AGM), or members with at least 95% of the votes for any other general meeting, agree to shorter notice pursuant to s 249H(2): s 249H(1). If the company is a listed public company, then 28 days’ notice must be given: s 249HA. A copy of the notice of meeting must be given individually to each member who is entitled to vote at the meeting, to each director and the company’s auditor (if any): ss 249J(1), 249K (a failure to do so for the latter is a strict liability offence with a penalty of 5 penalty units).

572 [11.200]

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How notice is given [11.220] The manner in which notice can be given to a member is prescribed by s 249J(3) – (5). It is no longer necessary for a company to send a hard copy of a notice if a member consents to being notified (by a nominated electronic means) that access to notices of meeting is available on the company’s website (by a nominated access means). In MDA National Ltd v Medical Defence Australia Ltd [2014] FCA 954 the Federal Court held that notification of costs for some 30,000 members can be via electronic communications. In this case, his honour, Yates J held that s 249J is satisfied where a link is provided for the member to download the relevant documents. See also Re Consolidated Media Holdings Ltd [2012] FCA 1186; Re Marengo Mining Ltd (No 2) [2012] FCA 1498; Re David Jones Ltd [2014] FCA 530. SECTION 249J(3)-(5) Notice of meetings of members to members and directors How notice is given (3)

A company may give the notice of meeting to a member: (a)

personally; or

(b)

by sending it by post to the address for the member in the register of members or the alternative address (if any) nominated by the member; or

(c)

by sending it to the fax number or electronic address (if any) nominated by the member; or

(ca)

by sending it to the member by other electronic means (if any) nominated by the member; or

(cb)

by notifying the subsection (3A); or

(d)

by any other means that the company’s constitution (if any) permits.

member

in

accordance

with

Note: A defect in the notice given may not invalidate a meeting (see s 1322). (3A)

If the member nominates: (a)

an electronic means (the nominated notification means) by which the member may be notified that notices of meeting are available: and

(b)

an electronic means (the nominated access means) the member may use to access notices of meeting;

the company may give the member notice of the meeting by notifying the member (using the nominated notification means): (c) that the notice of meeting is available; and (d)

how the member may use the nominated access means to access the notice of meeting. [11.220] 573

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This subsection does not limit subsection (3). When notice by post or fax is given (replaceable rule – see section 135) (4)

A notice of meeting sent by post is taken to be given 3 days after it is posted. A notice of meeting sent by fax, or other electronic means, is taken to be given on the business day after it is sent. When notice under paragraph (3)(cb) is given (replaceable rule – see section 135)

(5)

A notice of meeting given to a member under paragraph (3)(cb) is taken to be given on the business day after the day on which the member is notified that the notice of meeting is available.

Contents of the notice [11.230] The contents of the notice are prescribed by s 249L. SECTION 249L Contents of notice of meetings of members (1)

A notice of a meeting of a company’s members must: (a)

set out the place, date and time for the meeting (and, if the meeting is to be held in 2 or more places, the technology that will be used to facilitate this); and

(b)

state the general nature of the meeting’s business; and

(c)

if a special resolution is to be proposed at the meeting – set out an intention to propose the special resolution and state the resolution; and

(d)

if a member is entitled to appoint a proxy – contain a statement setting out the following information: (i)

that the member has a right to appoint a proxy;

(ii)

whether or not the proxy needs to be a member of the company;

(iii)

that a member who is entitled to cast 2 or more votes may appoint 2 proxies and may specify the proportion or number of votes each proxy is appointed to exercise.

Note: There may be other requirements for disclosure to members. (2)

The notice of the AGM of a listed company must also: (a)

574 [11.230]

inform members that the resolution referred to in subsection 250R(2) (resolution on remuneration report) will be put at the AGM; and

Meetings

(b)

| TOPIC 11

if at the previous AGM at least 25% of the votes cast on a resolution that the remuneration report be adopted were against adoption of the report (but the same was not the case at the AGM before that): (i)

explain the circumstances in subsection 250V(1) would apply; and

which

(ii)

inform members that the resolution described in subsection 250V(1) as the spill resolution will be put to the AGM if that subsection applies.

Note: Subsection 250R(2) requires a resolution to adopt a remuneration report for a listed company to be put to the vote at the company’s AGM. (3)

The information included in the notice of meeting must be worded and presented in a clear, concise and effective manner.

In Fraser v NRMA Ltd (1995) 55 FCR 452 at 453, it was stated that directors have a fiduciary duty to provide the members with such material information as will fully and fairly inform members of what is to be considered at the meeting and for which their proxy may be sought … such as will enable members to judge whether to attend the meeting and vote for or against the proposal or whether to leave the matter to be determined by the majority attending and voting at the meeting

The directors also have a duty to ensure that the information provided is presented in a way which can be understood by an ordinary shareholder who reads the documents quickly. A notice that could only be understood by an experienced business person is likely to be considered to be misleading and deceptive: see Deveraux Holdings Pty Ltd v Pelsart Resources NL (No 2) (1985) 4 ACLC 12 and Fraser v NRMA Ltd (1995) 55 FCR 452. This duty is reinforced by s 249L(2) and (3).

Resolutions Ordinary resolutions [11.240] Ordinary resolutions are motions passed by a majority (that is, at least 50%) of those members present and entitled to vote. Note: it is 50% of those members present (either in person or by proxy) and voting at the meeting rather than 50% of all members on the company’s register. Indeed, for most large listed public company meetings, this represents a small percentage of the total number of members because most small shareholders do not attend the meeting or lodge proxies. The company’s internal rules and/or the Corporations Act will specify when an ordinary resolution of members is required. One example where an ordinary resolution is required by the Corporations Act is an equal capital [11.240] 575

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reduction: see Topic 14. Ordinary resolutions for the removal of a director of a public company (s 203D) or for the removal of an auditor (s 329) and, in some circumstances, for the appointment of a replacement director (s 203D) require extra notice, namely: • at least 21 days’ notice of the meeting to the members (s 249H(3) – (4)) – shorter notice under s 249H(2) is not permitted; and • notice of “intention to move” such a resolution must be given to the company at least two months before the meeting is held. However, if the company calls the meeting after the notice of intention is given, the meeting can pass the resolution even if the meeting is held less than two months after the notice of intention was given (assuming that the members still received at least 21 days’ notice of the meeting): ss 203D(2) and 329(1A).

Special resolutions [11.250] “Special resolution” is defined in s 9. DICTIONARY SECTION 9 (ABRIDGED) “special resolution” means: (a)

in relation to a company, a resolution: (i)

of which notice as set out in paragraph 249L(1)(c) has been given; and

(ii)

that has been passed by at least 75% of the votes cast by members entitled to vote on the resolution; …

As with ordinary resolutions, note that the majority of 75% is not of all members, only of: • those who are entitled to vote – there may be some members who have no voting rights, or only limited voting rights (this is sometimes the case with preference shares); and • those votes actually cast – that is, of those members who bother to attend (either in person, or by completing and lodging a written proxy) and vote at the meeting. If a special resolution is to be proposed at a meeting, this intention and the terms of the resolution must be stated in the notice of meeting: s 249L(1)(c), see [11.230]. The effect of this requirement is to ensure that members are given at least 21 days’ notice (s 249H, see [11.210]) and 28 days in the case of a listed public company: s 249HA. Matters that are required by the Corporations Act to be decided by special resolution include adoption or alteration of a constitution, selective capital reduction, and voluntary winding up. Again, the company’s internal rules may specify other instances that require approval by a special resolution of members. 576 [11.250]

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| TOPIC 11

Member-initiated resolutions [11.260] Members may propose either ordinary or special resolutions at any general meeting (including the AGM) of the company. To be able to put any resolution, a minimum of 100 members must consent or the member(s) must control at least 5% of the votes: s 249N(1). If the company receives notice of a resolution from the member(s), the resolution must be put at the next general meeting of the company that occurs more than two months after the notice is received: s 249O(1). The proposing member(s) can request the company to distribute an explanatory statement (no longer than 1,000 words) with the notice of meeting (s 249P), as long as the statement is not defamatory: see NRMA v Snodgrass (2002) 170 FLR 175 and an interesting example can be found at http://www.maynereport.com/articles/2009/11/26-1305-6351.html where Senator Nick Xenophon’s s 249P statement appears at the end of the Woolworths Ltd 2009 AGM notice with a reply from the company’s chair.

Quorum at members' meetings [11.270] Unless the company’s constitution provides otherwise, a quorum (that is, the minimum number required to be present before a meeting can proceed) is two members who must be present at all times during the meeting: s 249T(1). (Remember, a single member company passes a resolution by recording and signing the resolution: s 249B.) For the purposes of determining if a member is “present”, note s 249T(2) (or any different provision in the company’s constitution). SECTION 249T(2) Quorum (replaceable rule – see section 135) (2)

In determining whether a quorum is present, count individuals attending as proxies or body corporate representatives. However, if a member has appointed more than 1 proxy or representative, count only 1 of them. If an individual is attending both as a member and as a proxy or body corporate representative, count them only once.

Note 1: For rights to appoint proxies, see s 249X. Note 2: For body corporate representatives, see s 250D.

Section 249T(3) – (4) (which are replaceable rules) provide that, unless a quorum is present within 30 minutes of the time specified for the meeting, no business is to be transacted and the meeting must be adjourned. If no quorum is present within 30 minutes after the time for the resumed meeting, the meeting is dissolved. Companies choosing to have their own internal rules may have adopted a version of Table A which provides for an adjournment of one week to the same time and place.

[11.270] 577

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In circumstances where a quorum cannot be achieved, the court has power under s 249G to order a meeting and to validate the proceedings: see Re Totex-Adon Pty Ltd [1980] 1 NSWLR 605.

Conduct of members' meetings [11.280] As with the conduct of directors’ meetings, technology may be used. Note s 249S: SECTION 249S Technology A company may hold a meeting of its members at 2 or more venues using any technology that gives the members as a whole a reasonable opportunity to participate. Note: See s 1322 for the consequences of a member not being given a reasonable opportunity to participate.

Greater use of technology, particularly electronic communications (see [11.20] and [11.220]) has the potential to increase and improve shareholder participation at meetings. The same rules requiring a company to keep minute books recording the proceedings and resolutions passed at a meeting and resolutions passed without a meeting, apply to both directors’ meetings and members’ meetings: s 251A and see [11.20].

Voting rights and procedures at members' meetings [11.290] Votes cast by members at meetings may be counted in two ways: (a)

“a show of hands” – one vote for each person entitled to vote who is actually present at the meeting; or

(b)

“a poll” where each share carries one vote – this, therefore, involves counting any proxy votes the company has received prior to the meeting and enables a shareholder who holds more than one share to vote different ways on the one resolution.

Different rights to vote at members’ meetings may attach to different classes of shares. It is a replaceable rule that, subject to those different rights, each member has one vote on a show of hands and on a poll has one vote for each share held: s 250E and ss 254A(2) and 254B (preference shares). In certain circumstances members have a right to demand a poll: ss 250K – 250L (not replaceable rules) and s 250M (a replaceable rule). Generally, a member can demand a poll on any resolution. Five or more voting members, or 5% of members with voting rights, or the chair can demand a poll: s 250L(1). A constitution can make it easier, but not harder, for a poll to be called: s 250L(2). 578 [11.280]

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| TOPIC 11

Proxies and body corporate representatives [11.300] A proxy is a person who is appointed by a member as an agent to attend and vote on her or his behalf at a members’ meeting. Because a company cannot itself physically attend a meeting, there are provisions which enable a company that is a member of another company to appoint a representative, or, a proxy, to act on its behalf: s 249X(1A). Figure 11.3: Issues – members’ meetings

[11.310] RRs = replaceable rules (see Topic 10) * These sections are replaceable rules ** Section 249X is a replaceable rule for proprietary companies but is a mandatory rule for public companies [11.310] 579

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The rules on who can be a proxy and a body corporate representative and how they can be appointed are contained in ss 249X – 250D. These provisions encourage the use of electronic means to send company information to members and to provide a procedure for electronic authentication of the appointment of a proxy. From 2011 ss 250BB – 250BD now deals with the manner in which a proxy vote can be made if the appointment specifies a way to vote, when the vote transfers to the chair from a non-chair proxy and when the vote concerns remuneration of key management personnel. Note that s 249X (who can appoint a proxy) is a replaceable rule for proprietary companies, but is mandatory for public companies. For an example of a Proxy Form go to. http://www.aluminalimited.com/uploads/briefcase/ 2012/2012%20AWC%20Proxy%20form%20-%20final.pdf.

Irregularities Statutory provision [11.320] Procedural and minor irregularities, such as lack of a quorum, insufficient notice of directors’ or members’ meetings or lack of opportunity to participate in a meeting being held at two or more venues, do not necessarily invalidate meetings or other proceedings: s 1322. Under s 1322(2) – (3B) the court will only interfere and invalidate a meeting or proceeding if an irregularity has caused or is likely to cause “substantial injustice” which cannot be remedied by any order of the court: see Chew Investment Australia Pty Ltd v General Corporation of Australia Ltd (1987) 6 ACLC 87; Re Vanfox Pty Ltd [1995] 2 Qd R 445; Australian Innovation Ltd v Petrovsky (1996) 21 FCR 218 (noting that s 1322 is equivalent to s 539 of the Companies (Victoria) Code 1981); Yazbek v Aldora Holdings Pty Ltd (2003) 45 ACSR 53; Whitehouse v Capital Radio Network Pty Ltd (2004)13 Tas R 27; Re Chinese Cultural Club Limited (2004) 183 FLR 33 and Cordiant Communications (Australia) Pty Ltd v Communications Group Holdings Pty Ltd (2005) 194 FLR 322. Section 1322(4) goes further and allows “any interested person” to apply to the court for an order validating irregularities generally, not just procedural irregularities: see, for example, Jordan v Avram (1997) 141 FLR 275 (extracted below); DCT v Portinex Pty Ltd (2000) 34 ACSR 391 at 402; NRMA v Spragg (2001) 161 FLR 243; NRMA v Snodgrass (2002) 42 ACSR 371; Nagler v H Volski & Co Pty Ltd (in liq) (No 2) (2001) 20 ACLC 431; NRMA v Bradley (2002) 42 ACSR 616; Re NRMA Association Ltd; Lavercombe v Auscott Ltd (2006) 202 FLR 390. Case study Jordan v Avram (1997) 141 FLR 275 (Supreme Court of Victoria)

[11.330] FACTS: Two families each had 50% of the shares in a company that ran a hotel. They had entered into a shareholders’ agreement giving each family the right to appoint two directors to the company. Two members of one family were appointed directors pursuant to this agreement. However, the 580 [11.320]

Meetings

| TOPIC 11

appointments were invalid because the procedures set out in the company’s constitution had not been followed. The family sought a declaration under s 1322(4) that the appointment was not invalid, even though it was not in accordance with the constitution. DECISION: the Court held that it had jurisdiction under s 1322(4) to make an order declaring an act to be valid even though the act was not in accordance with the company’s constitution. The subsection “covers irregularities, errors and mistakes of a general nature and is expressed in very wide language”: at 275. In this case the Court held that the applicants had acted honestly in appointing the directors and made the declaration sought.

General law principle [11.340] The general law doctrine of unanimous consent (also known as “the Duomatic principle”) can also provide assistance in instances where meeting formalities have not been complied with. In general terms, the doctrine provides that where all the members (who are entitled to attend and vote) have expressly or impliedly waived those formalities, the decisions taken by them will be binding: see Re Duomatic Ltd [1969] 2 Ch 365, and, for Australian authority, Re Compaction Systems Pty Ltd [1976] 2 NSWLR 477. There are limits to the operation of the doctrine, the most important of which is that the members’ assent must have been based on full knowledge: Herrman v Simon (1990) 8 ACLC 1,094. In some situations the members may be trying to avoid the consequences of the decision, arguing that because the formalities were not followed the decision does not bind them.

Further Reading Bateman G Company Meetings: What You Need to Know Butterworths, 2001 Bonollo F “Electronic Meetings” (2002) 14 Australian Journal of Corporate Law 95 Boros E “Corporations Online” (2001) 19 C&SLJ 492 Boros E “The Online Corporation: Electronic Corporate Communications Discussion Paper” (1999) ASIC and the Centre for Corporate Law and Securities Regulation at the University of Melbourne, http:// www.law.unimelb.edu.au/__data/assets/pdf_file/0005/1710257/146online1.pdf Boros E “Virtual Shareholder Meetings: Who Decides How Companies Make Decisions?” (2004) 28 MULR 265 Darvas P “Section 249D and the “Activist” Shareholder: Court Jester or Conscience of the Corporation?” (2002) 20 C&SLJ 390 Duffy M “Shareholder Democracy or Shareholder Plutocracy? Corporate Governance and the Plight of Small Shareholders” (2002) 25 UNSWLJ 434 Hocking J “Shareholder Participation in the Modern Company and the Square Root Rule” [2001] Butterworths Corporations Law Bulletin [20] [11.340] 581

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Lipton P Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, Ch 14 and [12.100]-[12.140] Magner E Joske’s Law and Procedure at Meetings in Australia 11th ed, Thomson Reuters, 2012 McConvill J “Electronic Proxies and the Corporations Act” (2002) 20 C&SLJ 141 McConvill J “The Obligation of Proxies to Vote as Directed: The Present State of Play and the Need for a Resolution” (2003) 21 C&SLJ 262 Pathak N & Lauritsen H “A Shareholder’s Right to Call General Meetings – A Sharp Sword for the Disgruntled Shareholder or Just a Blunt Instrument” (2005) 23 C&SLJ 283 Shand MW “The Postponement by the Directors of Meetings Convened by a Member Under s 249F of the Corporations Law” (2001) 19 C&SLJ 160 Simmonds R “Why Must We Meet? Thinking about Why Shareholders’ Meetings are Required” (2001) 19 C&SLJ 506

582 [11.340]

TOPIC 12 Corporate Liability: Contract, Tort and Crime Principles........................................................................................ Contract – overview.......................................................................... General requirements........................................................................ How does a company execute a contract?............................................. Statutory assumptions – ss 128-129 ..................................................... Usual (implied actual) authority of company officers................................ Defects in appointment ..................................................................... Indoor management rule ................................................................... Contracts – conclusion ...................................................................... Tort – overview ................................................................................ Criminal law – overview..................................................................... Civil and criminal penalties under the Corporations Act............................ Corporate liability for War Crimes ........................................................

[12.10] [12.20] [12.30] [12.40] [12.90] [12.180] [12.230] [12.240] [12.270] [12.280] [12.310] [12.380] [12.400]

Extract from J Yogaratnam and L Xynas, Corporations Law: In Principle (10th ed, Lawbook Co., 2017), Chapter 7.

Aim At the end of this Topic you should know: • how companies can be liable in contract, with particular reference to ss 128-130; and • how companies can be liable in crime and tort under: – the organic theory; or – vicarious liability.

PRINCIPLES [12.10] This Topic looks at how liability can be imposed on the company (as distinct from its officers or members) in contract, tort and crime. Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act) [12.12] Key CATSI provisions: Part 3–5—Corporation powers and how they are exercised, in particular Division 99 (99-1—Agent exercising a corporation’s power to make contracts etc.); Part 3–6—Assumptions people dealing with Aboriginal and Torres Strait Islander corporations are entitled to make, in particular Division 104 (assumption provisions); and Part 3–8—Service on Aboriginal and Torres Strait Islander corporation. An example of where an Indigenous company CEO was in breach of the civil provisions and the criminal code was in the former chief executive officer of the [12.12] 583

Business and Corporate Law

North Australian Aboriginal Family Violence Legal Services Aboriginal Corporation (NAAFVLS), Ms Veronica Cubillo. Extract from the ORIC’s website: http://oric.gov.au/publications/media-release/former-darwin-ceocommitted-stand-trial-nt-supreme-court.

MR1415-08 – Former Darwin CEO committed to stand trial in NT Supreme Court [12.14] The former chief executive officer of the North Australian Aboriginal Family Violence Legal Services Aboriginal Corporation (NAAFVLS), Ms Veronica Cubillo, has today been committed for trial in the Northern Territory Supreme Court on 11 charges. NAAFVLS is based in Darwin in the Northern Territory and provides legal services and assistance to the victims of family violence and sexual assault in 20 Aboriginal communities in the Northern Territory. The charges were brought under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (CATSI Act) and the Criminal Code (NT) by the Registrar of Indigenous Corporations, Anthony Beven. Ms Cubillo was originally charged with four charges under the CATSI Act and eight under the Criminal Code. She has been committed on revised charges six under the CATSI Act and five under the Criminal Code. The charges relate to Ms Cubillo misusing NAAFVLS’ funds and forging documents to obtain financial benefits for herself totalling $9,574.50. One charge alleges Ms Cubillo was intentionally dishonest and failed to exercise her powers and duties for a proper purpose in relation to the use of funds that were granted to NAAFVLS following a funding application she submitted to a private company for $10,000. Background: For further information on this case see the Registrar’s media release of 24 October 2013 (MR1314-11).

Contract – overview [12.20] Liability of companies for contracts that have purportedly been entered into on their behalf, has long been a vexed issue. Most of the cases involve actions by financial institutions against companies for enforcement of security/loan agreements entered into by a director of the company. The company will argue that it is not bound by the agreement on the basis that the director acted without proper authority. Even if the “correct” signature(s) are on the document, the company will argue that the director (or other agent) had no “substantive” authority to enter the agreement on the company’s behalf: see [12.110].

584 [12.14]

Corporate Liability: Contract, Tort and Crime

| TOPIC 12

There are many competing policy issues, which are important to bear in mind when you try to reconcile the cases: need for commercial certainty (ie, that contracts will be enforceable) fairness to outsiders who have dealt with the company in good faith

V

need to protect members and creditors from unauthorised acts of company officers members’ right to have the company’s internal rules complied with

This is an area where company law principles overlap with the laws relating to agency and contract. This Topic highlights some of the issues peculiar to companies. Although the company is a separate legal entity, it needs people (its agents) to act on its behalf. Under the general law, the company will only be liable where a person or an “organ” of the company (for example, the board) has the authority to enter into the contract on the company’s behalf or where the company has approved or “ratified” an act or contract that has been done or made without proper authority – this ratifying can be as straightforward as using the goods that are subject to the contract. General law principles of authority are discussed at [12.50] and [12.170] – [12.210]. Authority can also be established under statutory assumptions: ss 128 – 129 of the Corporations Act 2001 (Cth) (Corporations Act). This Topic focuses mainly on the statutory assumptions.

General requirements [12.30] Before considering the statutory assumptions, there are certain general requirements that need to be satisfied. A contract will not be binding if: • it is contrary to the general law – for example, against public policy; • it is contrary to a provision of the Corporations Act which makes such a transaction either: – void (for example, s 588FP: a security interest in favour of a company officer which the officer as a secured party purports to enforce within six months of its creation without leave of the court (NB: Prior to 30 January 2012 this was provided for by s 267 and referred to “charges”.); or – voidable at the option of the company and the company exercises that option (for example, s 588FF(1)). A liquidator (who stands “in the shoes” of the company) can, by obtaining a court order, have certain types of “unfair” or “uncommercial” contracts declared unenforceable (see Topic 19); • it was not, at the time it was entered into, for the benefit of the company, and the other party to the transaction knew that the directors were acting contrary to the company’s interests – it may be that in these circumstances [12.30] 585

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the transaction can be avoided by the company (see ANZ Executors & Trustee Co Ltd v Qintex Australia Ltd [1991] 2 Qd R 360); or • it was made at a time when the company was insolvent or on the verge of insolvency, and this was known to the other party – the company cannot act in disregard of the interest of its creditors and such contracts may be set aside: see the Qintex case (above); Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722; Walker v Wimborne (1976) 137 CLR 1; Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50; Lyford v Commonwealth Bank of Australia (1995) 13 ACLC 900; Addstead Pty Ltd (in liq) v Liddan Pty Ltd (1997) 70 SASR 21. Also, if the contract is outside the company’s capacity (that is, if its execution would breach objects or restrictions in the company’s constitution) and the contract has not been executed by both parties, it may be possible to obtain a general law injunction to prevent its execution: see [11.260].

How does a company execute a contract? [12.40] A company can either execute a contract: • directly – by one of its “organs” (for example, the board of directors or the members in general meeting) who are seen as the directing mind and will of the company; or • indirectly – by one of its agents (such as a director, manager, or company secretary) acting on its behalf and with its authority. There are two kinds of authority: • actual authority, that can be either: – express – stated orally or written (for example, in the internal rules or in a resolution of the board of directors); or – implied – either as authority usually associated with that kind of position (for example, the position of managing director carries with it certain implied powers, see [12.200]), or on the basis of “acquiescence” by the company (in condoning unauthorised transactions purportedly entered into on its behalf); and • apparent (sometimes also referred to as “ostensible”) authority – where the company has “held out” or represented that a particular person has authority to act on its behalf.

General law agency principles [12.50] It should be noted that a person dealing with a company (an outsider) will rarely perceive the distinctions between the types of authority just mentioned, particularly the distinction between implied actual authority and apparent authority. What is really being relied upon is the appearance of authority. That is why the statutory assumptions that an outsider is entitled to make when dealing with a company (ss 128 – 130) have become so important. 586 [12.40]

Corporate Liability: Contract, Tort and Crime

| TOPIC 12

They assist outsiders with enforcement of contracts that might otherwise fail because the company, or its agent, has failed to comply with the company’s internal rules, or has acted in breach of its powers or duties. Also relevant to general law principles of agency, is the general law assumption called the “indoor management rule”: see [12.230]. This assumption was developed by the courts before the statutory assumptions were introduced. The indoor management rule is more limited in operation than the statutory assumptions and has virtually been replaced by ss 128 – 129. However, the indoor management rule may still assist an outsider in situations that fall outside the scope of ss 128 – 129, or in respect of contracts executed prior to the introduction of the statutory assumptions: see [12.230]–[12.240]. Also, the indoor management rule will continue to be relevant to non-corporate businesses: see Chapter 2 (Yogaratnam).

Statutory provisions [12.60] Section 126 deals with the powers of agents. SECTION 126 Agent exercising a company’s power to make contracts (1)

A company’s power to make, vary, ratify or discharge a contract may be exercised by an individual acting with the company’s express or implied authority and on behalf of the company. The power may be exercised without using a common seal.

(2)

This section does not affect the operation of a law that requires a particular procedure to be complied with in relation to the contract.

Section 127 deals with the manner in which documents can be executed by a company. The importance executing a document in accordance with s 127 was highlighted in Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd [2014] SASCFC 103 where a contract was executed without the signature of another party to the agreement. In such a case, it was held that the offer was not properly executed therefore removing the potential for reliance on s 129(5) or (6) at [89]. However, the mere fact that the document did not specifically state that it had been executed in accordance with s 127 does not extinguish reliance on s 129. In BNY Trust Company of Australia Ltd v Banksia Finance and Leasing Co Pty Ltd [2013] NSWSC 1776, Hall J held that “provided the execution in relation to such a company complies with s 127(1)(c) there is no requirement for there to be a statement made to the effect that the document was executed

[12.60] 587

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pursuant to s 127 of the Act” at [72]. See also Australia and New Zealand Banking Ltd v Frenmast Pty Ltd [2013] NSWCA 459. SECTION 127 Execution of documents (including deeds) by the company itself (1)

A company may execute a document without using a common seal if the document is signed by: (a)

2 directors of the company; or

(b)

a director and a company secretary of the company; or

(c)

for a proprietary company that has a sole director who is also the sole company secretary – that director.

Note: If a company executes a document in this way, people will be able to rely on the assumption in subsection 129(5) for dealings in relation to the company. (2)

A company with a common seal may execute a document if the seal is fixed to the document and the fixing of the seal is witnessed by: (a)

2 directors of the company; or

(b)

a director and a company secretary of the company; or

(c)

for a proprietary company that has a sole director who is also the sole company secretary – that director.

Note: If a company executes a document in this way, people will be able to rely on the assumptions in subsection 129(6) for dealings in relation to the company. (3)

A company may execute a document as a deed if the document is expressed to be executed as a deed and is executed in accordance with subsection (1) or (2).

(4)

This section does not limit the ways in which a company may execute a document (including a deed).

588 [12.60]

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Figure 12.1: Summary – execution of documents

Figure 12.2: Example of a typical execution clause on a proxy* form

[12.80] Some points to note: 1.

If the contract needs to be executed as a deed, then it must state that it is a deed and be executed in the manner described in s 127(1), (2): see [12.60].

2.

Section 127 is not a replaceable rule: see Topic 10. Thus, compliance with these methods of execution will be binding even if, for example, the company’s constitution states that it must be the managing director and the company secretary who sign. In Myers v Aquarell Pty Ltd (in liq) [2000] VSC 429, at the time of the transaction, the company’s sole director/secretary had witnessed the fixing of its common seal to a mortgage in accordance with s 127(2)(c). Gillard J held the company was bound, even though its constitution required the company to have at [12.80] 589

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3. 4.

least two directors and stated that at least one director and the company secretary must witness the fixing of the seal. Similarly, in LK Bros Pty Ltd v Collins [2004] QSC 026, Chesterman J held that a contract executed without seal by the company which was signed twice by the same person who was both its de facto managing director and the company secretary was executed in accordance with s 127(1)(b). The internal rules can authorise additional methods by virtue of s 127(4). A company is no longer required to have a common seal: s 123(1).

Statutory assumptions – ss 128–129 [12.90] If the general requirements are met (see [12.30]) and the contract has been executed in the correct manner (see [12.40]–[12.60]), the contract will be binding unless: • the agent lacked express or implied actual authority or apparent authority to enter into the contract on the company’s behalf – that is, lacked (substantive) authority under general law principles; and • the statutory assumptions in s 129 do not assist. To clarify:

agent had authority

→

agent did not have authority

→

binding (s 129 assumptions may provide evidentiary assistance) may still be binding as a result of the operation of s 129

Even if an agent has authority on the basis of general law agency principles, the assumptions in s 129 can still be of assistance. Under s 128(1) – (2) a person dealing with a company is “entitled” to make certain assumptions in relation to those dealings whether or not that person actually made them: Lyford v Media Portfolio Ltd (1989) 7 ACLC 271 and see dicta by Osborn J in Oris Funds Management Ltd v National Australia Bank Ltd [2003] VSC 315 at [112]. From an evidentiary point of view, it is easier to rely on the assumptions than to adduce proof of these matters.

Who can rely on the assumptions? [12.100] Section 128 provides that a person may rely on the assumptions in relation to “dealings” with a company. SECTION 128(1)-(2) Entitlement to make assumptions

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(1)

A person is entitled to make the assumptions in section 129 in relation to dealings with a company. The company is not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect.

(2)

A person is entitled to make the assumptions in section 129 in relation to dealings with another person who has, or purports to have, directly or indirectly acquired title to property from a company. The company and the other person are not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect.

Thus, a person may make the assumptions in s 129 in relation to “dealings” with a company (s 128(1)) or “dealings” with another person who has directly or indirectly acquired property from a company: s 128(2). The company will not be able to assert otherwise in any “proceedings”: s 128(1), (2). The term “dealings” has been given a wide interpretation. It includes: • a single transaction – Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279 at 307, Advance Bank Australia Ltd v Fleetwood Star Pty Ltd (1992) 10 ACLC 703 per Studdert J, affirmed in Story v Advance Bank Australia Ltd (1993) 31 NSWLR 722; and • pre-contractual negotiations – for example, Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1990) 9 ACLC 324 per Ormiston J. If there is a purported contract between company A and B and a question arises about the execution of that contract by company A, only B can plead reliance on the assumptions in s 129. A third party (that is, a person/company that is not a party to these dealings with company A) cannot rely on the statutory assumptions. However, the third party may be able to rely on the general law “indoor management rule”: see [12.230]–[12.240] and Australian Capital Television Pty Ltd v Minister for Transport & Communications (1989) 7 ACLC 525.

The assumptions [12.110] The assumptions are set out in s 129. SECTION 129 Assumptions that can be made under section 128 Constitution and replaceable rules complied with (1)

A person may assume that the company’s constitution (if any), and any provisions of this Act that apply to the company as replaceable rules, have been complied with. Director or company secretary [12.110] 591

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(2)

A person may assume that anyone who appears, from information provided by the company that is available to the public from ASIC, to be a director or a company secretary of the company: (a)

has been duly appointed; and

has authority to exercise the powers and perform the duties customarily exercised or performed by a director or company secretary of a similar company. Officer or agent

(b)

(3)

A person may assume that anyone who is held out by the company to be an officer or agent of the company: (a)

has been duly appointed; and

has authority to exercise the powers and perform the duties customarily exercised or performed by that kind of officer or agent of a similar company. Proper performance of duties

(b)

(4)

A person may assume that the officers and agents of the company properly perform their duties to the company. Document duly executed without seal

(5)

A person may assume that a document has been duly executed by the company if the document appears to have been signed in accordance with subsection 127(1). For the purposes of making the assumption, a person may also assume that anyone who signs the document and states next to their signature that they are the sole director and sole company secretary of the company occupies both offices. Document duly executed with seal

(6)

A person may assume that a document has been duly executed by the company if: (a)

the company’s common seal appears to have been fixed to the document in accordance with subsection 127(2); and

the fixing of the common seal appears to have been witnessed in accordance with that subsection. For the purposes of making the assumption, a person may also assume that anyone who witnesses the fixing of the common seal and states next to their signature that they are the sole director and sole company secretary of the company occupies both offices. Officer or agent with authority to warrant that document is genuine or true copy

(b)

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(7)

A person may assume that an officer or agent of the company who has authority to issue a document or a certified copy of a document on its behalf also has authority to warrant that the document is genuine or is a true copy.

(8)

Without limiting the generality of this section, the assumptions that may be made under this section apply for the purposes of this section.

The provisions contained in s 129(2)(b) and (3)(b) can be seen as statutory assumptions based on particular examples of implied and apparent authority. For the purposes of s 129(3), the “holding out” has to be done by the company. In Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1990) 9 ACLC 324 (upheld on appeal in Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279; (1991) 10 ACLC 253), this was held to embody the general law requirement that the holding out must be by someone with actual authority (either express or implied) to do so as an organ of the company, such as the board of directors: see [12.40] and see also National Australia Bank Ltd v Perkins (1999) 17 ACLC 1,665, Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 and Vero Insurance Ltd v Kassem [2010] NSWSC 838. For the purposes of s 129(5) and (6), reliance can also be made on the assumptions about who is a director or secretary under s 129(2), or who is held out as an officer or agent under s 129(3). The assumptions can be used cumulatively: s 129(8); see Sunburst Properties Pty Ltd (in liq) v Agwater Pty Ltd [2005] SASC 335.

Execution of contracts: s 129(5)-(6) [12.120] The operation of s 129(5) – (6) is more contentious. Section 129(5) was introduced in 1998 to reflect the fact that a common seal is now optional (s 127). In Vero Insurance Ltd v Kassem [2010] NSWSC 838 the plaintiff could not rely on the s 129(5) assumption for a proxy form because it was not executed in accordance with s 127(1). The majority of cases on the statutory assumptions have been about contracts executed under seal, relying on s 129(6) and its predecessors (s 164(3)(e) and, before 1 January 1991, s 68A(3)(e)). In Myers v Aquarell Pty Ltd (in liq) [2000] VSC 429 (see [12.75]) Gillard J at [73]–[75] held that a person was entitled to assume that the mortgage was duly executed under s 129(6) because it appeared to be executed in accordance with s 127(2). Some commentators argue that the assumptions contained in s 129(5) and (6) are limited to assisting an outsider in establishing due execution (formal authority). But these assumptions do not enable an outsider to enforce a contract where the transaction itself was entered into without the company’s authority (substantive authority). [12.120] 593

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The argument is that substantive authority is a separate matter that must be established either by the use of general law principles of authority (actual or apparent authority), or by use of statutory assumptions other than s 129(5) – (6): for example, s 129(2) – (3). The analysis in the case law is inconsistent – some judges appear to have considered both formal and substantive authority, but others have not: see the article by Ramsay, Stapledon and Fong referred to in the Further Reading for this Topic. It is likely that this issue will remain topical because financial institutions have a keen interest in this area. The dilemma they face is what representations can they rely on? and what independent searches and enquiries should they make?

Exceptions [12.130] People having dealings with companies can rely on these assumptions, whether or not they actually made them, and even if an officer of the company is acting fraudulently, unless “they knew or suspected that the assumption was incorrect”: s 128(3) and (4). Where there is such close association between the parties and the parties were “intimately involved” in the business dealings, such close association could satisfy s 128(4) of the Corporations Act, that is, the person “knew or suspected that the assumption was incorrect”. In Eden Energy Ltd v Drivetrain USA Inc [2012] WASC 192, Corboy J noted that “constructive knowledge” as found under the second limb of Barnes v Addy (1874) LR 9 Ch App 244, is not relevant to the application of s 128(4) at [90]. His Honour applied the principles laid out in Ford’s Principles of Corporations Law and outlined that “actual knowledge is required and constructive knowledge is not actual knowledge” at [83]. Conduct, statements, facts and circumstances should be used to determine if a person knew or suspected that the person lacked authority. This may involve the “hypothetical reasonable person in the same position”, drawing upon the established facts to conclude if the reasonable person would have known or been suspicious. However, this is a matter for determination by a court as an individual may deny such knowledge or suspicion leaving the matter ultimately to the judicial discretion on which evidence is preferred at [84]-[85]. A similar position was also taken in Australia and New Zealand Banking Ltd v Frenmast Pty Ltd [2013] NSWCA 459 where the court found that the person did have ostensible or actual authority to make communications on the half of the various entities due to a relatively long association with the bank in question where the person had been the primary point of contact. In Correa v Whittingham (No 3) [2012] NSWSC 526, a board sought to appoint an administrator. The company’s constitution stipulated that there must be a minimum of seven board members and at meetings, a quorum of four. The board had a total of four members when a decision was made to appoint an administrator, Mr Whittingham. The minutes of the meeting did not record the names of attendees, nor the date time or location of the meeting. The resolution 594 [12.130]

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itself did not specify a date under which it would have effect. Two board members signed the appointment, but only one director signed the minutes. Notification to Mr Whittingham of the appointment was signed by only one director. The court heard evidence from other administrators on the process which a diligent administrator undertakes when offered an appointment. One administrator suggested that the first thing which should be undertaken is a search of the company constitution to ensure that the appointment is valid. Further, the plaintiff suggested that an ASIC search which Mr Whittingham undertook would have disclosed the issues with the number of board members appointed and, inter alia, that the minutes appointing Mr Whittingham was procedurally irregular and problematic. The NSW Supreme Court found that Mr Whittingham “could and probably should” have enquired of the company’s other directors and the circumstances of his appointment. However, the court also found that Mr Whittingham did seek legal advice and “sought to confirm the circumstances surrounding his appointment” with one of the directors. His Honour, Black J, continued that even if these matters were sufficient to put Mr Whittingham on inquiry, they are inadequate to (at [59]): establish that he suspected, still less that he knew, that his appointment did not comply with that Constitution. Had Mr Whittingham known or suspected that matter, it would have been a simple matter for him to seek validation of his appointment by the court and there is no obvious reason why he would not have done so. Even if Mr Whittingham was on inquiry as to the validity of his appointment, this is not sufficient, in the absence of requisite knowledge or suspicion, to deprive Mr Whittingham of the ability to rely on the statutory assumptions under ss 128 and 129.

In addition, his Honour found that under s 128 the appointment of an administrator is sufficient to satisfy “dealings” at [41]–[42]. SECTION 128(3)-(4) (3)

The assumptions may be made even if an officer or agent of the company acts fraudulently, or forges a document, in connection with the dealings.

(4)

A person is not entitled to make an assumption in section 129 if at the time of the dealings they knew or suspected that the assumption was incorrect.

Application of law to pre-1 July 1998 contracts [12.140] The statutory assumptions in ss 128 – 129 discussed above (see [12.100]–[12.110]) only apply to contracts executed after 1 July 1998. Contracts executed prior to 1 July 1998 are governed by the provision (if any) that applied on the date the contract was executed: Northside Developments Pty Ltd v [12.140] 595

Business and Corporate Law

Registrar-General (1990) 170 CLR 146. Contracts executed between 1984 and 1 July 1998 are governed by the predecessor to s 129 – namely s 164(3) and, before 1 January 1991, s 68A(3). There have been several important cases on these former provisions. Remember, even though many of these cases are relatively recent, they concern contracts executed before 1 July 1998 and so have been decided on the basis of the former wording. The assumptions contained in the former sections are essentially the same as those in s 129, but the exceptions are different. Section 128(4) refers to “knew or suspected”. The former section referred to “actual knowledge” and a “connection or relationship” such that the person “ought to know” that the assumption was incorrect. The different wording must be kept in mind when the cases are considered. The exception in the former s 164(4)(b) (where there is a connection or relationship with the company such that the outsider “ought” to have known that the assumption was incorrect) was interpreted broadly in several decisions: Bank of New Zealand v Fiberi Pty Ltd (1992) 10 ACLC 1557 on appeal Bank of New Zealand v Fiberi Pty Ltd (1993) 12 ACLC 48 and the High Court refused leave to appeal, Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 232; Sixty-Fourth Throne Pty Ltd v Macquarie Bank (1996) 130 FLR 411; and Pyramid Building Society (in liq) v Scorpion Hotels Pty Ltd (1996) 14 ACLC 679. In the Fiberi decision, Kirby P went so far as to equate the words “ought to know” with the general law concept of “put on inquiry”: see [7.230]. The other judges in Fiberi (Priestly and Clarke JJA) reached the same conclusion on the facts, but drew a distinction between the general law and statutory terminology. (The view of Priestley JA in Fiberi was preferred by Hansen J in Koorootang Nominees Pty Ltd v Australia & New Zealand Banking Group Ltd [1998] 3 VR 16.) Prior to these decisions, the general law exceptions were considered to be wider (that is, less favourable to the outsider) than those contained in the former statutory provision: Northside Developments (above) and Advance Bank Australia Ltd v Fleetwood Star Pty Ltd (1992) 10 ACLC 703; affirmed Story v Advance Bank Australia Ltd (1993) 31 NSWLR 722.

Post-1 July 1998 [12.150] There has been considerable debate about how ss 128 and 129 should operate: see articles by Hammond, Loxton and Chapple and the Note in the Further Reading for this Topic. In the absence of any relevant cases on these provisions (apart from Myers v Aquarell Pty Ltd (in liq) [2000] VSC 429; LK Bros Pty Ltd v Collins [2004] QSC 026 (see [12.75] and [12.110]) and Oris Funds Management Ltd v National Australia Bank Ltd [2003] VSC 315 in which these issues were not directly relevant) this debate is likely to continue. The question arises, therefore, as to the relevance of the case law on the pre-1 July 1998 provisions. There are two possibilities:

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1.

these cases are only relevant when applying the pre-1 July 1998 provisions (that is, dealings with a company between that date and 1984); or

2.

they will be considered by the court when construing the word “suspected” in s 128(4).

One aid to interpretation is the Explanatory Memorandum to the Company Law Review Act 1998 (Cth) (at [8.7]). It states: This objective test [ie, the new words “knew or suspected”] is stricter [ie, more favourable to outsiders] than the current law [ie, former s 164] and makes it clear that the common law “put on inquiry” test has no application to the statutory provisions: see Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 48, 14 ACSR 736.

There is a view that the cases on the pre-1 July 1998 wording will not be of assistance in interpreting s 128(4): see Austin and Ramsay, [13.300] in the Further Reading for this Topic. Those cases will be important for any pre-1 July dealings, but given the uncertainty about the interpretation of the wording of ss 128 – 129, they must be treated with caution before they can be relied on for guidance on dealings post-1 July 1998. Justice Gray in Sunburst Properties Pty Ltd (in liq) v Agwater Pty Ltd [2005] SASC 335 suggested that s 128(4) places the burden on the company to establish the person’s subjective knowledge or suspicion that the s 129 assumptions relied on were incorrect. This interpretation may be criticised because it encourages banks and others to “don blinkers” when faced with warning signs: see Lipton, Herzberg and Welsh, [5.375] in the Further Reading for this Topic. There are other points to note about the current s 128(4) wording: • the word “suspect” is used elsewhere in the Corporations Act (for example, s 588G) and other legislation, so guidance may be obtained from cases on other areas – for example, Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 in which the High Court of Australia considered the meaning of “knew or had reason to suspect” in the context of s 95(4) of the Bankruptcy Act 1924 (Cth); see also Oris Funds Management Ltd v National Australia Bank Ltd [2003] VSC 315 at [118] per Osborn J; • the current provision applies the same test of knowledge or suspicion to anyone who seeks to rely on the assumptions regardless of whether they are connected with or related to the company; • the burden of proof would seem to be on the company – in other words, the company must prove that the person seeking to rely on the assumption knew or suspected otherwise*; • the relevant time to consider is the time when the person entered into the transaction – if they subsequently found out about the irregularity, it does not prevent them relying on the assumption*; and [12.150] 597

Business and Corporate Law

• actual knowledge is tested subjectively, but can include certain knowledge that is inferred by the court from the surrounding circumstances – for example, if X (who is seeking to rely on the assumptions) denies knowing that Y was not appointed as a director, the court, in reaching its decision on whether X is telling the truth or not, can consider X’s conduct as well as what X claims to have known or not known. The court can draw inferences from the outsiders’ conduct.* *This was also the position under the pre-1 July 1998 wording.

Analysis of cases [12.160] The following table summarises the results of the main cases on the pre-1 July 1998 wording. [12.170] Analysis of pre-1 July 1998 cases Tests

Glass And Mirrors 1 Yes Yes Yes Yes

Brick And Pipe 2 Yes Yes Yes Yes

Fleetwood Starr 3 Yes N/A Yes Yes

Fiberi 4

SixtyFourth Throne 5 No No No Yes

Pyramid 6

Koorootang 7

s 164(3)(b)*? No No N/C s 164(3)(c)#? No No N/C s 164(3)(e)+? No No N/C Did lender (or No Yes Yes solicitor) do company search? Did exceptions No No No N/A Yes Yes Yes apply? Lender successful? Yes Yes Yes No No No No * now see s 129(2) # now see s 129(3) + now see s 129(6) N/A not applicable on the facts N/C not considered in the judgment 1 Australia & New Zealand Banking Group Ltd v Australian Glass & Mirrors Pty Ltd (1991) 9 ACLC 702 2 Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1990) 9 ACLC 324 3 Advance Bank Australia Ltd v Fleetwood Star Pty Ltd (1992) 10 ACLC 703 4 Bank of New Zealand v Fiberi Pty Ltd (1993) 12 ACLC 48 5 Sixty-Fourth Throne Pty Ltd v Macquarie Bank (1996) 130 FLR 411 6 Pyramid Building Society (in liq) v Scorpion Hotels Pty Ltd (1996) 14 ACLC 679 7 Koorootang Nominees Pty Ltd v Australia & New Zealand Banking Group Ltd [1998] 3 VR 16

If you look at the last line of the table (“Lender successful?”), you will notice that the pre-Bank of New Zealand v Fiberi Pty Ltd (1992) 10 ACLC 1557 cases seem to indicate that outsiders will be able to use the statutory assumptions successfully where they have, at least, conducted a company search prior to executing the contract. However, the post-Fiberi cases (all of which are decisions at first instance) seem to indicate a harder line on outsiders. None of the lenders were successful even where they or their solicitors had searched. The Explanatory Memorandum (see [12.140]) gives some indication that this trend prompted the changes to the wording of the exceptions in 1998. 598 [12.160]

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But remember, because of changes to the wording of the exceptions, the cases on the former section may not be a useful guide for contracts executed post-1 July 1998: see [12.140].

Usual (implied actual) authority of company officers [12.180] The scope of the usual (implied actual) authority of certain company officers, whether or not these officers are also directors is relevant both to the general law agency principles and s 129: see NCR Australia Pty Ltd v Credit Connection Pty Ltd (in liq) [2004] NSWSC 1 at [130]-[146] where Austin J discussed the extent of the apparent authority of the “national credit manager” of a company. Some of the assumptions in s 129 refer to the “authority” of an officer or agent or to the “duties customarily exercised or preformed by a director or company secretary”.

Individual directors [12.190] Under the usual form of internal rules, an individual director does not have any actual or apparent authority to act on the company’s behalf: Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146; Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1990) 9 ACLC 324; on appeal Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1991) 10 ACLC 253 and Perkins v National Australia Bank Ltd (1999) 30 ACSR 256; affirmed in National Australia Bank Ltd v Perkins (1999) 17 ACLC 1,665. Directors usually only have authority when acting collectively as a board. An individual director could have authority if: • he or she were expressly authorised by the internal rules, the board or a duly executed power of attorney (express actual authority); or • the board knows that the director has purportedly been acting on the company’s behalf (without authority) and has “acquiesced” in the director’s actions (see Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 and Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (above) (implied actual authority)); or • he or she were “held out” by the company to have such authority – that is, given apparent authority or an assumption of such authority can be made under s 129(3). Note: The position of the Chair may be slightly different from other directors acting individually. From the particular circumstances of the company, it may be arguable that the Chair has greater authority.

Sole director companies [12.200] If the sole director is also the sole shareholder, then s 198E(1) (which is not a replaceable rule, see Chapter 6 (Yogaratnam) at [6.60]) has the effect of conferring all the company’s powers on that director. If the director is not also the sole shareholder, then the actual authority of the director may be limited by the company’s constitution. But the usual or [12.200] 599

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implied actual authority of a sole director in that situation may still be wider than her or his express actual authority.

Managing directors [12.210] Most of the cases concern contracts entered into by a managing director or a person who purports to act as a managing director. A company may never have appointed a managing director, but an individual director may be acting as a “de facto” managing director with the acquiescence of the other members of the board: see [12.180]. Managing directors are rarely the “organ” of the company, although the internal rules might make them so. Usually, managing directors are appointed by the board of directors, which means that their authority is delegated to them by the board. Section 201J, a replaceable rule, gives the board power to appoint a managing director. The directors can confer on a managing director any powers that the directors can themselves exercise: s 198C, a replaceable rule. Even if the directors do not specify the powers conferred, a managing director has implied powers and authority deriving from the office held: Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549; Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR 72; Re Tummon Investments Pty Ltd (in liq) (1993) 11 ACLC 1139 and LK Bros Pty Ltd v Collins [2004] QSC 026. Generally, a managing director has usual (implied actual) authority to do all such acts as are necessary to carry on the company’s business in the ordinary way. While this gives a managing director wide powers over the company’s day-to-day activities, it would not extend to more “critical decisions” such as selling the company’s main undertaking or winding up the company: Re Qintex Ltd (No 2) (1990) 8 ACLC 811.

Company secretaries [12.220] Generally, a company secretary will have usual (implied actual) authority from the office he or she holds to look after the administrative side of the company’s affairs. It is not certain, however, whether that authority extends to the signing of contracts for the sale or purchase of goods. It is necessary to look at the nature of the company and what is normally done by a secretary within that kind of company. For example, the secretary of a large, publicly listed company may have fairly considerable powers in areas dealing with administrative matters such as employing staff: Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711 and Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146.

Defects in appointment [12.230] Even if there is some defect in appointment, a managing director’s or other directors’ acts are still valid according to s 201M, if they are within the scope of what is normally done by a managing director or director, 600 [12.210]

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respectively: see s 201M extracted at [6.210], and Chapter 6 (Yogaratnam). An example of a defect in appointment would be a board purporting to make an appointment when it lacked a quorum. However, there is a difference between a defect in appointment and no appointment at all. If no attempt has been made to appoint a person as managing director (or director), then that is not a mere defect, and the acts of a person purporting to hold that office are not authorised: Morris v Kanssen [1946] AC 459. Section 201M would not validate acts in those circumstances, although s 129(3) may still assist a person attempting to enforce a contract with the company.

Indoor management rule [12.240] Under the general law, if an outsider entered into a contract with a person who purported to act for the company but who had no proper authority, the contract was (unless ratified) voidable at the company’s option. This was considered a harsh consequence for outsiders (such as creditors) who had dealt with the company in good faith, and who had no means of establishing that all the necessary internal approvals and requirements had been satisfied. To overcome this problem, the general law developed the “indoor management rule”: Royal British Bank v Turquand (1856) 119 ER 886. The indoor management rule has been stated by the High Court in Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 at 154 per Mason CJ as: persons dealing with a company in good faith may assume that acts within its constitution and powers have been duly performed and are not bound to inquire whether acts of internal management have been regular…

A person will not be acting “in good faith” (and therefore, will not be able to rely on the rule) if they knew or were “put on inquiry” that the acts were not regular: Northside. The indoor management rule is embodied in the statutory assumptions that have been contained in the Corporations Act since 1984: now s 129(1). However, the exceptions to the statutory assumptions are worded differently to the general law exceptions: see [12.120]-[12.140].

Continued role for the indoor management rule [12.250] Under the general law the indoor management rule will continue to be relevant to companies for: • actions by third parties (see [12.90]) – Australian Capital Television Pty Ltd v Minister for Transport & Communications (1989) 7 ACLC 525; • pre-1984 dealings – Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 which was decided on general law principles as no statutory assumptions existed at the time the relevant contract was executed; and • dealings with any corporation that is not a “company” within the definition in s 9, such as a building society or a credit union. [12.250] 601

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Constructive notice [12.260] Under the general law there was a doctrine of “constructive notice” that was relevant to both the issue of ultra vires (see Topic 10) and principles of agency – that is, it affected both a company’s capacity and the authority of its agents. Put simply, an outsider dealing with a company was deemed to have notice of all the company’s public documents (the leading case was Ernest v Nicholls (1857) 6 HL Cas 401). Clearly this doctrine was a counter-balance to the indoor management rule. The doctrine of constructive notice shifted the onus back to the outsider. Section 130 (and its predecessors) represents a change of this policy – it abolishes the general law doctrine of “constructive notice”. The policy balance on this point is now clearly in favour of the outsider. SECTION 130 Information available to the public from ASIC does not constitute constructive notice A person is not taken to have information about a company merely because the information is available to the public from ASIC.

Contracts – conclusion [12.270] Even if the general requirements at [12.30] are satisfied, a contract will not be binding on a company if it is entered into by an organ or agent of the company without authority. However, even when, in reality, authority does not exist and the contract has not been ratified by the company, authority may be assumed to exist by either: • the operation of general law agency principles of implied actual and apparent authority; or • the statutory assumptions contained in ss 129, 128(3) and (4). An outsider will not be entitled to rely on any statutory assumption that they “knew or suspected” was incorrect: s 128(4). There are also certain limited situations where the general law indoor management rule will continue to assist outsiders in their dealings with companies.

Tort – overview [12.280] Torts are civil wrongs. The main aim of the law of torts is to shift the financial burden for the loss from the victim to the “person” (natural or corporate) whose activity caused the damage. There are two theories of liability for torts – the organic theory and vicarious liability. The liability may arise under general law or there may be an express statutory provision which needs to be interpreted.

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Organic theory [12.290] The organic theory (or “primary liability”) says that a company is liable where the people who act for the company and who commit a tort are acting as the organ of the company. The “organ” means the “brain”, that is, “the directing mind and will” of the company. (Note, this point was also considered in the contract case of Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1991) 10 ACLC 253.) Under the organic theory the important thing is to discover who is the “directing mind” of the company. If the directing mind has committed a wrong, the company will be liable: Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705.

Vicarious liability [12.300] In most tort cases, the courts do not look for a directing mind. Rather, the company’s liability is “vicarious”. Vicarious liability means liability for the acts of others. For example, employers are liable for the acts of their employees who commit wrongs within the scope of their employment. If an employee or agent commits a wrong within the scope of her or his employment, the company will be liable. Similarly, damages in favour of a company can be reduced on the grounds of contributory negligence by the company, where directors or management were negligent: Daniels v Anderson (1995) 37 NSWLR 438. Section 128(3) (see [12.120]) codifies the general law regarding vicarious liability of companies for fraudulent acts of their agents and employees. Such fraudulent acts will not absolve a company from liability.

Criminal law – overview [12.310] In criminal law, people are not usually liable for their acts unless they have a guilty mind (mens rea) – that is, an intention to do something wrong (knowing it was unlawful). How then can a company ever be criminally liable as it does not have a mind, let alone a guilty one? There are two ways in which the law has attempted to overcome this problem. Companies can be criminally liable, as they can in tort, under either the organic theory or vicarious liability. Again, there may be an express statutory provision which imposes liability on either of these bases.

Organic theory [12.320] Again, under the organic theory the question is, “Who is the directing mind and will of the company?” If the directing mind and will committed the offence, the company is liable because its “brain” committed the crime. The leading case is Tesco Supermarkets Ltd v Nattrass [1972] AC 153. See also S & Y Investments (No 2) Pty Ltd v Commercial Union Assurance Co of Australia Ltd (1986) 44 NTR 14.

[12.320] 603

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Case study [12.330] Tesco Supermarkets Ltd v Nattrass [1972] AC 153 (House of Lords). FACTS: Tesco Supermarkets (one of the largest supermarket chains in England) advertised Radiant washing powder on special at a reduced price of 2/11 rather than the normal price of 3/11. The reduced price was marked on the packets and displayed in posters in the shop window. A Tesco shop ran out of the packets marked with the special price and a shop assistant restocked the shelves with packets marked at the normal 3/11 price. The assistant did not tell the store manager of this and did not remove the poster which advertised Radiant soap powder on special at 2/11. A pensioner saw the poster but could only find packets marked at the higher price. When he took it to the cash register he was told that the shop had run out of the specially marked packets and he had to pay 3/11. He complained to the relevant authority and the company was fined £25 and costs for breaching the Trade Descriptions Act 1968 (UK) which prohibits any misleading statements about the price at which goods are being offered. Tesco’s appeal ultimately went to the House of Lords. ARGUMENT: Tesco sought to rely on the defence in s 24(1) of the Trade Descriptions Act 1968 (UK) that the offence was committed by another person (the shop assistant) and Tesco itself had taken all reasonable precautions and exercised due diligence to avoid the commission of an offence by the company or any person under its control. There was no doubt that the shop assistant had breached the Act, but could it be said that in these circumstances the company itself was liable? Was the shop assistant or the store manager acting “as” the company? DECISION: The House of Lords upheld Tesco’s appeal and held that here the shop assistant and the store manager were not acting “as” the company. In the leading judgment Lord Reid held that for the company to be liable the person acting must have been the “directing mind or will” of the company (quoting from an earlier judgment of Lord Denning). Lord Reid continued at 171: Normally the board of directors, the managing director and perhaps other superior officers of a company carry out the functions of management and speak and act as the company. Their subordinates do not. They carry out orders from above and it can make no difference whether they are given some measure of discretion. But the board of directors may delegate some part of their functions of management giving to their delegate full discretion to act independently of instructions from them. I see no difficulty in holding that they have thereby put such a delegate in their place so that within the scope of the delegation he can act as the company: [1972] AC 153 AT 168. The board of Tesco had set up a “chain of command” from individual store managers through district and regional supervisors. However, the company itself remained in control and had not delegated any part of its functions or responsibilities so that the acts of the shop assistant or the store manager could not be said to be those of the company itself.

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[12.340] However, in Meridian Global Funds Management Asia Ltd v Securities Commission (1995) 13 ACLC 3,245 the Privy Council (on appeal from the New Zealand Court of Appeal) imposed liability on the company for failure to notify a particular share acquisition, even though the employee who had the relevant knowledge was not the company’s “directing mind and will”. The Privy Council said that a contrary view would frustrate the policy of the Corporations Act by encouraging the delegation of tasks without proper monitoring: see also AAPT Ltd v Cable & Wireless Optus Ltd (1999) 17 ACLC 974.

Statutory attribution of liability [12.350] The Meridian Global Funds Management Asia Ltd v Securities Commission (1995) 13 ACLC 3,245 case aside, there are some instances where general law principles regarding attribution of liability to a company have produced what Parliament has regarded as overly lenient results. Consequently, statutes sometimes include provisions which achieve the same result as the court did in the Meridian and AAPT Ltd v Cable & Wireless Optus Ltd (1999) 17 ACLC 974 cases. Namely, they widen the liability of a company by imputing to it the mental state of employees or agents, not just those who are the “directing mind and will”. For an example of such a provision see s 769B(3) where the state of mind of a director, employee or agent is used to establish the “intention” – the state of mind – of the company: see also [12.350]. Remember, such a provision is not imposing vicarious liability (that is, where the criminal act is that of the employee, but the employer is made liable). Instead, the provision is deeming the wrong committed by the employee to be the wrong of the company.

Vicarious liability [12.360] Vicarious liability is a stricter form of liability. It occurs with laws dealing with such areas as food, drugs, liquor licensing, occupational health and safety, and environmental protection – areas where society wants to punish the wrongdoer without having to prove the wrongdoer had the intention to cause harm. Under statutes that create “strict liability” offences, the prosecution will not have to prove a guilty mind. Usually, no defence is available once the unlawful act is proved: see Mousell Bros Ltd v London & North Western Railway Co [1917] 2 KB 836; and Lloyd v Grace Smith & Co [1912] AC 716. Where a mens rea element is required to establish an offence companies can generally expect to avoid liability: see Presidential Security Services of Australia Pty Ltd v Brilley [2008] NSWCA 204. The imposition of liability in this way is another method used by the legislature to overcome the difficulties of attributing to an artificial legal entity liability that requires proof of a guilty mind. The other method – a deeming provision that imputes the state of mind of employees to the company – was discussed under the organic theory: see [7.280], [7.310]. [12.360] 605

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Criminal Code Act [12.370] The Criminal Code Act 1995 (Cth) codifies the law and overcomes the difficulties, under general law principles, of imposing criminal liability on a corporation. Section 3 provides that the Schedule to the Criminal Code Act 1995 (Cth) contains the Criminal Code. It contains the general principles of criminal responsibility that are intended eventually to apply uniformly throughout Australia. The Criminal Code was proclaimed on 1 January 1997 and, since December 2001, has applied to all offences under Commonwealth legislation, unless expressly excluded as, for example, by ss 769A and 769B of the Corporations Act: see [12.350]. All Commonwealth criminal legislation has been amended to give effect to these general principles. The intention is that this model will also be adopted by the States. The Criminal Law Officers Committee of the Standing Committee of Attorneys-General, “General Principles of Criminal Responsibility” Final Report (December 1992) states (at 109) that the aim of the Criminal Code is to: develop a scheme of corporate criminal responsibility which as nearly as possible, adapted personal criminal responsibility to fit the modern corporation…

The Criminal Code provides express, statutory attribution of criminal liability to corporations in relation to any offence created by Commonwealth laws (including the Corporations Act). Under the Criminal Code: • bodies corporate may be found guilty of offences punishable by imprisonment (even though a company cannot be imprisoned) – fines can be imposed for such offences (Criminal Code, s 12.1(2)); • the physical element of an offence is to be attributed to a corporate principal where the offence is committed by an employee, agent or officer acting within the actual or apparent scope of her or his employment (Criminal Code, s 12.2); • there are rules for attributing “fault” to a corporation: – the “corporate culture” may be such that fault can be attributed – if “the body corporate failed to create and maintain a corporate culture that required compliance with the relevant provision” (Criminal Code, s 12.3(2)(d)); – the corporation can be liable where it has “expressly, tacitly or impliedly authorised or permitted the commission of the offence” (Criminal Code, s 12.3(1)); and – if an element of negligence is required, this can be attributed even where no single act of an individual employee, agent or officer amounts to negligence – the corporation can be liable if the conduct of its employees, agents or officers viewed as a whole was negligent: Criminal Code, s 12.4(2).

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Civil and criminal penalties under the Corporations Act [12.380] Various sections of the Corporations Act impose: • civil penalties on companies – that is, fines and banning orders; and • criminal penalties on companies – the fine for a company convicted of such an offence can be as high as five times the maximum for an individual: s 1312. In some instances the penalty is imposed because the company is vicariously liable for acts of its directors, employees or agents. In other instances the penalty is imposed on “the company” itself even though the actions at fault will necessarily be those of its directors, employees or agents. For example, s 769B(1) deems certain conduct by directors, employees or agents of the company (relating to financial services and products, Chapter 22 (Yogaratnam)) to be conduct engaged in by the company. This is not vicarious liability but an example of organic/primary liability. Part 9.4 deals with offences generally and Sch 3 to the Corporations Act sets out the penalty, pecuniary or otherwise, for each offence.

Self-incrimination [12.390] Companies are denied the right to silence in criminal proceedings and cannot claim the right to privilege against self-incrimination or exposure to civil penalty: s 1316A and Environment Protection Authority v Caltex Refining Co Pty Ltd (1993) 178 CLR 477.

Corporate liability for War Crimes [12.400] While there is a lack of prosecutions against corporations for international war crimes, in 2013 Swiss prosecutors investigated a Swiss gold-refining company, Argor-Heraeus SA, for pillaging Congolese gold during time of war which accordingly funded Hilter’s was machine. The significance of this case is well summarised by James G Steward in Turn to Corporate Criminal Liability for International Crimes: Transcending the Alien Tort Statute, The, 47 NYU J Int’l L & Pol 121, 206 (2014-2015): On a more global level, the Argor-Heraeus case is one of the first criminal cases involving corporate responsibility for international crimes, and the first time that a company has ever faced criminal scrutiny for pillaging natural resources from war zones. So, beyond the significance of pillage for the extractive industry, there is a sense that Argor-Heraeus opens Pandora’s box–a set of undiscovered relationships between commerce, atrocity, corporate criminal liability and international criminal law waiting to be mapped. No matter how this particular investigation plays out, the very fact of a formal investigation confirms the plausibility of these cases, sounding the beginnings of a brave new turn in thinking about global corporate accountability.

Further Reading Austin RP and Ramsay I Ford’s Principles of Corporations Law 16th ed, LexisNexis, 2014, Chs 13, 14 and 16 [12.400] 607

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Capuano A, “Catching the Leprechaun: Company Liability and the Case for a Benefit Test in Organic Attribution” (2010) 24 AJCL 177 Lipton P, Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, Ch 5

Contract Bristow A and Roins G “To Seal or not to Seal” (FindLaw Australia, January 2003), http://www.findlaw.com.au/articles/1302/to-seal-or-not-to-seal.aspx viewed 6 September 2012 Chapple L and Lipton P Corporate Authority and Dealings with Officers and Agents (CCH Australia Limited and Centre for Corporate Law and Securities Regulation, University of Melbourne, 2002) Edwards R “The Application of the Statutory Internal Management Rule to Cheques” (2000) 18 C&SLJ 242 Hammond C ““Put Upon Inquiry” Has Been Put to Rest Under Section 128(4) of the Corporations Law, But Have Third Parties Dealing With Companies Been Placed in a Stronger Position? – A Question of Statutory Interpretation” (1998) 16 C&SLJ 562 Law L and Pascoe J “Financiers and Corporate Borrowers: Protection Versus Liability” (2000) 11 AJCL 219 Loxton D “One Step Forward, One Step Back: The Effect of Corporate Law Reform on Procedures in Dealing with Companies Borrowing or Giving Guarantees” (1999) 10 Journal of Banking and Finance Law & Practice 24 Ramsay I M, Stapledon G P and Fong K “Affixing of the Company Seal and the Effect of the Statutory Assumptions in the Corporations Act” (1999) 10 Journal of Banking and Finance Law & Practice 38 Hardingham S “Sections 128-129 of the Corporations Act: Allocating Risk of Loss for Unauthorised Corporate Contracts” (2004) 22 C&SLJ 559

Tort Goldring J “Making Corporate Officials Personally Liable for Statutory Torts” (1994) 4 AJCL 376 Grantham R “Attributing Responsibility to Corporate Entities: a Doctrinal Approach” (2001) 19 C&SLJ 168

Criminal law Acquaah-Gaisie G “Enhancing Corporate Accountability in Australia” (2000) 11 AJCL 139 Andrew D “The New Commonwealth Criminal Code” (1995) 69 LIJ 908 Brand V “Legislating for Moral Propriety in Corporations? The Criminal Code Amendment (Bribery of Foreign Public Officials) Act 1999” (2000) 18 C&SLJ 476 608 [12.400]

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Clough J and Mulhern C The Prosecution of Corporations (Oxford University Press, 2002) Edwards R “Corporate Killers” (2001) 13 AJCL 231 Fisse B Howard’s Criminal Law 5th ed, The Law Book Company, 1990 Hill J “Corporate Criminal Liability in Australia: an Evolving Corporate Governance Technique?” [2003] Journal of Business Law 1 Hodges C “Manslaughter by Corporations The UK Law Commission Proposals” (1994) 22 APLR 81 Jefferson M “Recent Developments in Corporate Criminal Responsibility” (1995) 16 Company Lawyer 146 Le Mire S “Document Destruction and Corporate Culture: A Victorian Initiative” (2006) 19 AJCL 304 Liberman J and Clough J “Corporations that Kill: the Criminal Liability of Tobacco Manufacturers” (2002) 26 Criminal Law Journal 223 Neal D “Corporate Manslaughter” (1996) 70 Law Institute Journal (Vic) 39 Robert-Tissot SP “A Fresh Insight into the Corporate Criminal Mind: Meridian Global Funds Management Asia Ltd v The Securities Commission” (1996) 17 Company Lawyer 99 Rose A “1995 Australian Criminal Code Act: Corporate Criminal Provisions” (1995) 6 Criminal Law Forum 129 Toy P “The New Rules for Corporate Criminal Responsibility” (FindLaw Australia, December 2002), http://www.findlaw.com.au/articles/1149/thenew-rules-for-corporate-criminal-responsibilit.aspx last viewed 6 September 2012 Wheelwright K, “Goodbye Directing Mind and Will, Hello Management Failure: A Brief Critique of Some New Models of Corporate Criminal Liability” (2006) 19 AJCL 287 Woolf J “The Criminal Code Act 1995 (Cth) – Towards a Realist Vision of Corporate Criminal Liability” (1997) 21 Criminal Law Journal 257

[12.400] 609

TOPIC 13 Directors and Officers Management of companies................................................................ [13.10] Directors’ duties — Duty of care, skill and diligence................................. [13.310] Directors’ duties — Good faith and proper purpose................................. [13.850] Directors’ duties — Conflict of interest and disclosure..............................[13.1130]

Extract from J Yogaratnam and L Xynas, Corporations Law: In Principle (10th ed, Lawbook Co., 2017), Chapters 6, 11, 12, 13.

MANAGEMENT OF COMPANIES Principles Division of powers within a company [13.10] A company is an artificial legal entity – a creation of law. As such, people must act for and on behalf of the company. Persons authorised to act on its behalf become an “organ” of the company. Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act) [13.12] Part 3-2—Rules dealing with the internal governance of corporations, in particular, Divisions 57; and Part 6 of CATSI Act are some of the key provisions on management of Indigenous corporations. An example of where intervention by the Registrar of Indigenous Corporations had a positive impact on the Indigenous corporation. See extract from the ORIC’s website: http://oric.gov.au/publications/media-release/schoolback-minimbah.

MR1415-36 – School is back in for Minimbah [13.14] The Registrar of Indigenous Corporations, Mr Anthony Beven, has today announced the end of the special administration at the Minimbah Pre-school, Primary School Aboriginal Corporation. The corporation was established in 1987 and is located in Armidale, New South Wales. It provides pre-school and primary school education to about 139 Aboriginal and non-Aboriginal children in the Armidale region. The Registrar placed it under special administration on 24 November 2014 after an examination revealed that the corporation had traded at a loss for three consecutive years, had poor record keeping and inadequate controls over payments to directors and senior staff. In just over six months the special administrator, Mr Brian Woods, has placed the corporation on a sound financial footing, implemented a new organisational [13.14] 611

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structure and brought the corporation’s records up-to-date. All outstanding financial statements were prepared and audited and an arrangement was negotiated with the Australian Taxation Office to repay the corporation’s tax debt over several years. The special administrator worked closely with an advisory group on a new rule book to open up membership to all Aboriginal members of the community, not just parents or guardians of children at the school. This has enabled community leaders and former students and parents to become or remain as members and contribute to the school. The rule book also now provides for the appointment of independent directors to the corporation’s board. In conjunction with the Association of Independent Schools of New South Wales the special administrator has also arranged for construction to resume on the school’s unfinished multi-purpose hall. The special administrator has appointed a board of five directors, including three community elders, a parent and an independent director from The Armidale School, who has provided valuable support to the corporation during the special administration process. The Registrar will provide corporate governance training to the incoming directors in coming months. “It was important to achieve a successful outcome for this corporation so that it could continue providing strong educational and cultural outcomes to the children attending the school. I will continue to monitor the corporation closely over the next 12 months but the school now has a bright future,” Mr Beven said. See the Registrar’s media release of 24 November 2014 (ORICMR1415-15).

In the next example the Registrar of Indigenous Corporations took action against company directors for poor corporate governance who were former directors of a Canberra housing corporation. See extract from ORIC’s website: http://www.oric.gov.au/publications/media-release/registrar-takes-actionagainst-former-directors-canberra-housing. MR1415-27 – Registrar takes action against former directors of Canberra housing corporation [13.16] The Registrar of Indigenous Corporations, Anthony Beven, has begun civil penalty proceedings in the Federal Court in Canberra against three former directors of the Southside Housing Aboriginal Corporation (Southside Housing). Southside Housing is a Canberra-based not-for-profit corporation that was established to provide affordable housing to Aboriginal and Torres Strait Islander people in the ACT. In December 2013 the Registrar placed the corporation under special administration for the second time in seven years after an examination of the corporation’s books and records revealed a large number of serious concerns relating to poor governance and bad financial management. 612 [13.16]

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During the special administration an investigation was commenced by the Registrar. The Registrar has applied to the Federal Court for declarations and an order disqualifying the three former directors from managing corporations registered under the Corporations (Aboriginal and Torres Strait Islander) Act 2006. The Registrar is also seeking orders requiring them to pay a fine to the Commonwealth and compensation to Southside Housing. The Registrar alleges that the three former directors, Mr Fred Monaghan, Ms Teresa Monaghan and Ms Kim Peters controlled the corporation and ran it for their own benefit. The directors lived in the properties owned by the corporation, did not pay all of their rent and had the corporation pay part of their excess water charges. Of most concern was that the directors allowed the corporation’s seven houses to fall into disrepair with two declared uninhabitable. Significant expenditure is required to return the houses to a habitable state. “This is an unfortunate case where poor governance and the self-interest of directors have led to at least two publicly funded houses not being available to the Aboriginal and Torres Strait Islander community,” Mr Beven said. “If directors are more interested in what they personally can get from a corporation then they should not be directors.” For more information about the special administration of Southside Housing Aboriginal Corporation see ORICMR1314-21 and ORICMR1415-19 at http:// www.oric.gov.au.

Board of directors as an organ of the company [13.20] The organs of most companies will be the board of directors and the members in general meeting. The internal rules usually provide that the main organ of the company is the board of directors. For example, s 198A of the Corporations Act 2001 (Cth) (replaceable rule) provides: SECTION 198A Powers of directors (replaceable rule – see section 135) (1)

The business of a company is to be managed by or under the direction of the directors. Note: See section 198E for special rules about the powers of directors who are the single director/shareholder of proprietary companies.

(2)

The directors may exercise all the powers of the company except any powers that this Act or the company’s constitution (if any) requires the company to exercise in general meeting. Note: For example, the directors may issue shares, borrow money and issue debentures.

[13.20] 613

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General meeting as an organ of the company Express powers [13.30] The general meeting becomes the organ of the company when the company’s powers are expressly granted to the general meeting by either: • the Corporations Act – for example, electing/removing directors, altering the constitution and appointing or removing auditors; • the company’s own internal rules – for example, s 201G, a replaceable rule, giving the power to appoint directors to the general meeting; and • if a listed public company, the (Australian Securities Exchange) ASX Listing Rules.

Residual powers [13.40] Residual power may also fall to the general meeting. Where the constitution is silent as to who can exercise a particular power of the company, the general meeting will probably be the relevant organ.

Board vs Members What is the situation if the general meeting objects to a decision of the board? [13.50] Where a company’s internal rules include s 198A or a similar rule, the members in general meeting cannot give directions to the board on how to exercise its powers of management. Nor can the general meeting overrule any action of the board in relation to management of the company: see Automatic Self Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34; NRMA v Parker (1986) 6 NSWLR 517; NRMA v Bradley (2002) 42 ACSR 616; and Massey v Wales (2003) 57 NSWLR 718. The principle is a reincarnation of the genius of incorporation, namely that an artificial entity is created at the time of incorporation and the company has its own legal and managerial existence separate from its owners. The board of directors should not be seen as subordinate to, or merely an agent of, the general meeting. These two bodies are separate organs of the company with their respective powers delineated by the Corporations Act, the company’s internal rules and (if applicable) the ASX Listing Rules. However, there are three situations where the general law has vested the general meeting with residual power to act for the company (the primary power resides in the board): 1.

when the board of directors is unable to act for any reason – for example, if the board is in deadlock and cannot reach a decision (Barron v Potter [1914] 1 Ch 895);

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2.

when the general meeting has power to ratify breaches of duty by the directors as long as its ratification does not constitute fraud on, or oppression of, minority members or, in some circumstances, where the interests of creditors are involved; and

3.

when the directors are in breach of their duties and refuse to initiate an action on the company’s behalf against themselves. The members may take such action in the name of the company by bringing a statutory derivative action: see Pt 2F.1A. (Conversely, the general meeting cannot stop legal proceedings where the board has initiated them under a power conferred on the board by the constitution: John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113.)

Single director/shareholder companies [13.60] For single director/shareholder companies the traditional distinction between ownership and management is somewhat artificial. This is reflected by ss 198E and 201F, which remove the conventional division of powers for single director/shareholder companies. SECTION 198E(1) Single director/shareholder proprietary companies (1)

Powers of director – The director of a proprietary company who is its only director and only shareholder may exercise all the powers of the company except any powers that this Act or the company’s constitution (if any) requires the company to exercise in general meeting. The business of the company is to be managed by or under the direction of the director. Note: For example, the director may issue shares, borrow money and issue debentures.

…

Section 201F empowers the single director to appoint another director by recording the appointment and signing the record. As soon as another director is appointed or another person takes up shares in the company, the traditional division between directors and shareholders will apply.

Corporate governance What is corporate governance? [13.70] There is no standard definition for the term “corporate governance”. A useful definition of what is meant by the term “corporate governance” was provided by Justice Owen in HIH Royal Commission, “The Failure of HIH Insurance Volume 1: A Corporate Collapse and Its Lessons” (April 2003) where his Honour stated (at p xxxiii): [13.70] 615

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[Corporate governance is] … the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations.

Viewed in this way, corporate governance is a dynamic and evolving institution which attempts to provide a structured and binding framework for the resolution of disputes and conflicts involving members, company officers and other interested parties. Further, corporate governance lays down the rules which are designed to ensure accountability, particularly from company officers, and to promote the objectives of transparency and enhanced shareholder value.

Debates, reforms and future proposals [13.80] The corporate governance debate was initially fuelled by investigations into some of the high profile entrepreneurs of the 1980s and took on increased importance following the collapse of companies such as Enron (in the US), HIH, Harris Scarfe, One.Tel and other companies, many of which were technology-based. The well-publicised dispute between directors of the National Bank in early 2004 has raised broader issues – notably the importance of board composition and of board committees and the role of shareholders, especially institutional shareholders. Originally, much of the debate centred around the question of whether increased statutory regulation was preferable to self-regulation. Following the corporate governance scandals of HIH, Harris Scarfe and other public entities, the Corporations and Market Advisory Committee (CAMAC) issued a discussion paper entitled “Corporate Duties Below Board Level” (May 2005) and a report similarlyentitled Corporations and Advisory Committee, “Corporate Duties Below Board Level” (April 2006). CAMAC recommended that the current directors’ duties contained in ss 180 – 184 be extended beyond directors and company officers (and employees for ss 182 – 183) to “any other person who takes part, or is concerned, in the management of the company, including persons who have performed functions on behalf of the company”. The CAMAC recommendations were clearly aimed at extending the scope of directors’ duties to any person engaged in a management function, past or present. The extended scope, if adopted, would have application to employees (full time, part time and casually employed) and contractors who are not directors or company officers. To date these recommendations have not been adopted. In addition, government policy in Australia (and other countries such as the United States and the United Kingdom), at least in respect of audit and financial reporting and continuous disclosure, has been to introduce more stringent statutory regulation as a means of achieving higher standards of corporate governance. International corporate governance developments have largely stemmed from perceived inadequacies in reporting, disclosure and auditing requirements in international regulatory frameworks. In the UK, 616 [13.80]

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much of the focus has been on strengthening director requirements under UK Financial Reporting Council, “UK Corporate Governance Code” (formerly The Combined Code on Corporate Governance) (June 2010) available via http:// www.frc.org.uk; UK Financial Reporting Council, “Good Practice Suggestions from the Higgs Report” (June 2006) available at http://www.frc.org.uk/ getattachment/3e7365ee-8826-4ac8-aedf-66093cb0fd36/Progress-ReportReview-of-the-effectiveness-of-The.aspx; and UK Financial Reporting Council, “Internal Control: Revised Guidance for Directors on the Combined Code” (October 2005) available at https://www.frc.org.uk/getattachment/5e4d12e4a94f-4186-9d6f-19e17aeb5351/Turnbull-guidance-October-2005.aspx. The growth in private equity buy-outs has also been the subject of review in the Walker Working Group, “Guidelines for Disclosure and Transparency in Private Equity” (20 November 2007) available at http:// www.privateequityreportinggroup.co.uk/wp-content/uploads/2015/11/ wwg_report_final.pdf. The voluntary adoption of self-regulatory codes such as the ASX Corporate Governance Council, “Corporate Governance Principles and Recommendations with 2010 Amendments” (2nd ed, June 2010) is an important factor helping to improve standards of corporate governance, especially for listed companies. Although the ASX guidelines are voluntary, many listed companies include the principles in their annual reports outlining how the company has achieved good corporate governance. ASX Listing Rule 4.10.3 requires companies to provide details in their annual report which disclose whether the listed entity has followed the recommendations contained in the “Corporate Governance Principles and Recommendations with 2010 Amendments”, and provide reasons where Recommendations have not been followed. The higher standards for disclosure and corporate reporting have been reflected in the adoption of the CLERP 9 recommendations as reflected in the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (Cth) (CLERP 9 Act): see below. Both the ASX (through the ASX Disciplinary Tribunal) and ASIC have taken an active role in enforcing contraventions to the continuous disclosure regime. In Australian Securities & Investments Commission v Chemeq Ltd (2006) 234 ALR 511 French J commented on the importance of maintaining corporate governance compliance systems. According to his Honour (at [96]), the existence or otherwise of corporate governance standards and procedures is a relevant factor when determining penalty: The presence or absence of compliance systems is of importance. It is desirable also that the Court, in fixing penalty, is made aware of the reasons for the contravention. This may enable it to determine whether there were inadequate compliance systems or whether the contravention involved aberrant disregard by an individual of relevant policies and procedures.

French J added (at [89]) that the adoption of corporate governance standards which resemble or embody the ASX Corporate Governance Principles may [13.80] 617

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provide early warning signals to company directors and officers that there is material information which warrants disclosure: I am satisfied that, since the contraventions to which it has admitted, Chemeq has made substantial efforts to upgrade its compliance systems relating to continuing disclosure. It may be however that consideration should be given to some mechanism for providing internal early warning to officers of the company of material information or change in circumstances that may require disclosure.

Auditor independence and auditor's independence declaration reforms [13.90] The policy of auditor independence is illustrated by the CLERP 9 Act. The major reforms put in place by the Act were: • the implementation of the recommendations of the Commonwealth Treasury, Independence of Australian Company Auditors Report (March 2002) (Ramsay Report) and the Report of the HIH Royal Commission in respect of the regulation of auditors and the financial reporting system including a statutory requirement for auditor independence; • the introduction of tougher continuous disclosure rules and more stringent enforcement of those rules, especially for listed companies, including power for ASIC to issue infringement notices imposing fines for breaches of these rules; and • greater disclosure of directors’ and executives’ remuneration to shareholders and the introduction of new powers allowing shareholders in general meeting to pass a non-binding resolution on these matters and to question the company’s auditors.

2007 Reforms [13.100] Auditor independence was further strengthened by the Corporations Legislation Amendment (Simpler Regulatory System) Act 2007 (Cth). In 2007, the Amendment Act introduced changes to provide for auditor independence declarations to be given to directors before the auditor’s report is signed: s 307C(5)(c). The conditions that must be satisfied to provide for auditor independence declarations are contained in s 307C(5A): • the auditor’s independence declaration is given to the directors and the directors must sign the report within seven days; • the auditor’s report on the financial report is made within seven days after the directors’ report is signed; and • the auditor’s report includes a statement to the effect that either the declaration would be in the same terms if it had been given to the directors at the time the auditor’s report was made, or circumstances have changed since the declaration would differ if it had been given to the directors at the time the auditor’s report was made. Further, the Amendment Act introduced changes to the method of reporting inadvertent breaches of auditor 618 [13.90]

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independence. Auditors now will not be required to report inadvertent breaches of auditor independence where the statutory defence would be applicable: s 307C(5B). ASIC has now been given the authority to extend the period of time required for an auditor to resolve a conflict of interest situation. Concerns had been raised that the 21-day period provided insufficient time for an auditor to resolve a conflict of interest situation. Section 327B(2A) – (2C) has been amended to allow ASIC to grant more time to an auditor to resolve the conflict.

Recent issues in corporate governance: The global financial crisis and future reforms [13.110] The global financial crisis (GFC), which had its origins with subprime mortgages in the United States, produced unforeseen consequences for the world’s financial markets. The GFC led to a collapse in the availability of credit and caused widespread dislocation of the world’s equity, credit and debt markets. Dislocation of credit markets led to reassessment of credit risk, which in turn led to the perfect storm for debt-laden and financially vulnerable companies. Investors in listed companies such as ABC Learning, Allco Finance Group, Centro Property Group, MFS and RAMS Home Loans suffered significant losses. Difficulties in refinancing short-term debt were made worse with margin lending and short-selling practices, which continued to drive down share prices and exposed shareholders to further losses. The GFC ignited debate calling for further reforms to corporate governance designed to improve disclosure requirements for directors’ margin loans and short-term corporate liabilities. More recently, debate has centred on whether current disclosure requirements for reporting entities have in fact achieved the desired goals of market transparency and market integrity. Some investors believe that disclosure of corporate liabilities from listed companies has been unsatisfactory. The GFC not only adversely affected companies with high borrowings but also placed company officers and directors who had used margin loans to finance the purchase of shares in their respective companies under significant financial strain, which in turn further adversely affected investor sentiment. Investors have blamed the lack of disclosure regarding outstanding corporate liabilities, margin lending activity by company directors and short-selling practices from domestic and international hedge funds as factors contributing to sharemarket volatility.

Margin lending reform [13.120] In June 2008, the Minister for Superannuation and Corporate Law announced a review of the regulation governing margin loans. The Green Paper of the Commonwealth Treasury, “Financial Services and Credit Reform – Improving, Simplifying and Standardising Financial Services and Credit [13.120] 619

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Regulation” (June 2008) (Green Paper) proposes three options for the regulation and disclosure of margin loans: • Option One: to maintain existing arrangements with limited disclosure of margin loans where the margin loan is provided by a financial adviser; • Option Two: margin loans would fall within the regulatory scope and ambit of Ch 7 of the Corporations Act. This would entail both the licensing framework contained under Pt 7.6 and the disclosure and advice frameworks to be applied to regulate the provision of margin loans to investors; • Option Three: a new Commonwealth regulatory regime would be developed which would exist separately from Ch 7 of the Corporations Act. It is envisaged that under Option Three, the new regulatory regime would regulate the licensing of margin loan providers, regulate the new disclosure requirements for margin loan products and regulate market misconduct that could arise in regard to margin lending. The Green Paper called for submissions to be made on all three options. In the end Option Two was adopted, namely that margin lending would be regulated under Ch 7 of the Corporations Act. At the end of 2009, the Corporations Legislation Amendment (Financial Services Modernisation) Act 2009 (Cth) amended Ch 7 of the Corporations Act to introduce new regulation of margin lending activity. Part of the new regulation requires margin lenders to undertake a proper assessment of the suitability of any new margin loan for retail clients. The assessment requires margin lenders to make reasonable inquiries of their retail client and to assess whether the margin loan is at all suitable. A margin loan would ordinarily be assessed as unsuitable if at the time of the assessment it was likely the margin facility would go into a margin call and compliance with the call would cause the retail client undue hardship.

Public companies [13.130] In recent years, there has been increasing debate in Australia and overseas about corporate governance issues in relation to public companies. The recent GFC has led to calls for improving corporate governance standards, particularly with listed companies, in the United States, the United Kingdom, Europe and Australia. Proposals for reform of corporate governance include: • improving directors’ ethical standards and their disclosure of interests in their respective companies including the extent, if any, of margin loans and other debt instruments which have been used to purchase shares in a listed company; • greater disclosure of off-balance sheet items including unconventional debt financing used by the company as part of its day-to-day operations; • improved regulation of short selling of a listed company’s securities (that is, shares that are sold “short” on the basis that prices will fall so the shares can be purchased at a lower price and thereby crystalise a profit); 620 [13.130]

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• board composition – for example, should all boards have a non-executive chair and have a majority of non-executive directors? • the composition of, and extent of disclosure of, directors’ remuneration; • the composition and effectiveness of board committees; • the independence of auditors and analysts and the effectiveness of audit procedures; • the conduct of general (shareholder) meetings and the way in which questions by shareholders are handled by the board; • the role of institutional investors, remembering that many of these hold shares on behalf of individual members of superannuation funds and other managed investments; and • compliance with the Corporations Act, ASX Listing Rules (where appropriate) and relevant Accounting Standards. Such disclosure should be of sufficiently high standard for shareholders and end-users of financial reports to make informed decisions regarding their investment allocation. Reforms Shield Directors [13.135] David Crowe, Australian Financial Review, 19 May 2008 Canberra and the states have agreed to harmonise dozens of conflicting laws that impose harsh penalties on company directors, as part of an effort to restart sweeping national competition reforms once tipped to add billions of dollars to the national economy. The state and federal governments also agreed to create a single national licence for skilled workers to make it easier for qualified tradespeople to move between states without having to apply for new licences or repeat their training. Finance Minister Lindsay Tanner made the call for a new national reform agenda at a meeting with state officials on Friday that worked on ways to end differences between state and federal regulations. Mr Tanner’s proposal is aimed at reinvigorating a reform process that could add $17 billion to gross domestic product, according to a Productivity Commission analysis, but which has languished since the Howard government stopped incentive payments to the states in 2004. The minister assisting Mr Tanner on deregulation, Small Business Minister Craig Emerson, said the federal government wanted to “re-energise the reform agenda” by identifying new areas for co-operation with the states. While the reforms to directors’ liabilities are only part of the broader agenda, they act on industry calls for a single national regime setting out the personal liabilities of company directors in areas such as environmental protection, hazardous goods and fair trading. Dr Emerson said the goal was to review and reduce the laws in each jurisdiction that held directors to account for corporate problems. [13.135] 621

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“The basic issue is the concern that we could be making life so difficult for company directors that nobody would want to be a company director,” Dr Emerson said. The Friday meeting convened the deregulation working group formed last year to implement the objectives agreed by Prime Minister Kevin Rudd and premiers at Council of Australian Governments meetings. Those at the Friday meeting included Victorian Treasury deputy secretary Lynne Williams, Queensland under treasurer Gerard Bradley and South Australian deputy under treasurer Garry Goddard. The working group is to meet again in early July in order to report back to state and federal leaders at the next COAG meeting in early July. The agreement is not expected to reduce personal liability in occupational health and safety, seen as a separate issue for negotiation. But it complements a process started by Corporate Governance Minister Nick Sherry to clarify the standards expected of directors and survey 600 company directors to prepare a Treasury report. Senator Sherry last month hinted the trend towards imposing personal liability on directors needed to be checked, saying in a speech: “While this may be appropriate in exceptional cases, it now appears to be the norm.” Dr Emerson said the working group meeting also agreed to consider national licences for tradespeople, an issue debated since 1992 but still the subject of differences between states because the system of mutual recognition of qualifications does not always allow individuals to move “seamlessly” between states. The COAG working group is expected to identify some trades where a national licence could work.

Types of directors [13.140] The terms “director” and “company officer” are defined broadly in the Corporations Act to cover both appointed directors as well as “shadow” directors and “de facto” directors. In 2016, the position of a director as a “shadow” director became contentious in relation to Clive Palmer’s position in Queensland Nickel Pty Ltd where the administrators released a report implicating the then Federal MP as “shadow” director to the company and thereby potentially liable for the debts arising from trading while insolvent. The statutory definitions are set out in the following table.

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Table 13.1: Important statutory definitions Term Director (s 9)

Definition Means: • a person appointed to the position of director or alternate director; • de facto director • a person who acts in the position, but is called something else or who has not been validly appointed • shadow director • a person in accordance with whose directions the directors are accustomed to act.

Officer (of a corporation) (s 9)

Means a director, secretary, shadow officer (as in ASIC v Adler, see [13.380]) and certain people appointed to insolvent corporations.

Senior manager (s 9)

Means a person (other than a director or secretary of a corporation, a partner in a partnership or a trustee of a trust) who makes or participates in making decisions that affect the whole or a substantial part of the business, or has the capacity to affect significantly its financial standing.

Comment The Corporations Act imposes duties on directors (including de facto and shadow directors). The definition of a director also includes those people who actually exercise the powers of a director but are not appointed as directors. Otherwise the duties could easily be avoided by appointing someone as a “puppet”.

The CLERP 9 Act added a new definition of officer applying to an officer of an entity other than a corporation, such as a partnership; deleted the former definition of executive officer in s 9; and repealed s 82A (a slightly different definition of officer). These changes were designed to remove anomalies in the former definitions and to clarify the people who have duties and obligations under the Act. This definition, introduced by the CLERP 9 Act defines a new subclass of officer (replacing the former definition of executive officer).

These definitions attempt to codify the existing case law on deciding when someone is acting as a director – that is, as a person involved in top level management, rather than as acting as an expert, professional adviser or as an employee: see DCT v Austin (1998) 28 ACSR 565 and compare Natcomp Technology Australia Pty Ltd v Graiche (2001) 19 ACLC 1,117. Other, nonstatutory, expressions commonly used are summarised in the next table.

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Table 13.2: Other non-statutory “director” terminology [13.150] Term Nominee director

Executive director

Non-executive director Managing director Alternate director

Definition Person appointed on the understanding that he or she will represent the interests of a particular person or group. A director who is both on the board of directors and a full-time employee of the company. A part-time director of the company who is not an employee. A person to whom a board of directors may delegate its functions (eg, s 198C). A person appointed by a director to act in her or his place for a period of time (eg, s 201K).

Comment Eg, a director appointed to represent the interests of the parent company. Executive directors of one company are often “nonexecutive” directors of another. Also referred to, somewhat loosely, as an “independent director”. A managing director is also an executive director. May also be an executive or non-executive director.

Appointment of directors General [13.160] The main provisions in the Corporations Act dealing with appointment, rotation, resignation or removal of directors are in Pt 2D.3. Many of these provisions are replaceable rules, meaning that they can be modified or excluded by the company’s own constitution. Section 201A prescribes the minimum number of directors a company may have. SECTION 201A Minimum number of directors Proprietary companies (1)

A proprietary company must have at least 1 director. That director must ordinarily reside in Australia. Public companies

(2)

A public company must have at least 3 directors (not counting alternate directors). At least 2 directors must ordinarily reside in Australia.

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Table 13.3: Who can appoint a director? [13.170] Appointor General meeting (ordinary resolution) Existing directors

Section Section 201G –a replaceable rule. Pursuant to: • s 201H; or • s 201K (power to appoint an alternate director); or • s 201J (power to appoint a managing director) (all replaceable rules).

Personal representative or trustee of a director in a one-person company

Section 201F.

Comment The normal method of appointing directors. Section 201H is available to fill a casual vacancy, eg, due to the resignation of a director part way through the director’s term. Appointment must be subsequently confirmed by the general meeting. Time limits apply. Only applicable where director dies or becomes mentally incapable of managing the company.

The initial members usually appoint the company’s first director or directors. The internal rules of a company may also provide for the appointment of a managing director (for example, see replaceable rule s 198C) and a company secretary. A public company must have at least one secretary but this is now optional for a proprietary company: s 204A(1).

Table 13.4: Restrictions on appointments [13.180] Issue Age Consent Insolvency

Prior convictions

Restriction Must be over 18 years old.* The person must consent to appointment as a director. Can’t manage a corporation (whether as a director or in some other position) if an insolvent under administration. Same as if insolvent, where person has been convicted: • of an offence connected with the management etc of a company under the Corporations Act (eg Pt 2D.1) or other Australian laws; or

Section s 201B(1) s 201D ss 201B(2); 206B(3) and 206B(4) – unless obtaining leave of the Court under s 206G ss 201B(2), 206B(1) and 206B(2) – for a period of five years after conviction/release from prison unless leave of the Court under s 206G has been obtained

• of serious fraud.

Always check the company’s constitution, as it may impose additional restrictions on eligibility – for instance, a director might be required to hold a certain number of shares prior to their appointment.

Company secretary [13.190] Every public company must have at least one company secretary, at least one of whom must ordinarily reside in Australia: s 204A(2). However, the [13.190] 625

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appointment of a company secretary is now optional for a proprietary company: s 204A(1). Today, the company secretary of a large public company is the company’s senior administrative officer and has significant responsibilities and powers: see Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711. There is no definition of “secretary” in the Corporations Act but the duties imposed on directors and officers by Pt 2D.1 are specifically stated to apply to the secretary of a company: s 179. The nature of the secretary’s duties varies from company to company, but the Corporations Act imposes certain responsibilities on the secretary, particularly in relation to lodgment of notices and returns with ASIC: see s 188(1). In Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6 company secretaries were said to be “chief administrative officers” of companies who have a large compliance role under the Corporations Act, see, for example, s 188. In particular, secretaries have the power to enter into contracts for the company’s administration, however they have “no authority to participate in the management of the company’s affairs” at [76]. The internal rules may also provide for certain matters to be dealt with by the secretary, including witnessing the affixing of the company’s common seal (if any).

Defective appointments [13.200] If the formal requirements imposed by the Corporations Act and the internal rules, with respect to the appointment and qualification of directors and company secretaries, are not complied with, their acts will still be valid. See s 201M: SECTION 201M Effectiveness of acts by directors (1)

An act done by a director or secretary is effective even if their appointment, or the continuance of their appointment, is invalid because the company or director did not comply with the company’s constitution (if any) or any provision of this Act.

(2)

Subsection (1) does not deal with the question whether an effective act by a director: (a)

binds the company in its dealings with other people; or

(b)

makes the company liable to another person.

Note: The kinds of acts that this section validates are those that are only legally effective if the person doing them is a director (for example, calling a meeting of the company’s members or signing a document to be lodged with ASIC or minutes of a meeting). Sections 128-130 contain rules about the assumptions people are entitled to make when dealing with a company and its officers.

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Section 204E similarly validates the acts of a company secretary who was improperly appointed. In so far as the validation of these acts affects outsiders, consider also s 129(3).

Remuneration of directors Regulation of remuneration [13.210] Directors are in a fiduciary relationship with the company and, as a consequence, they are not entitled to any remuneration from the company unless it is specifically provided for in the company’s internal rules. The internal rules normally provide members with the power to fix the remuneration of directors: for example, s 202A, a replaceable rule, and s 202C for single director/shareholder companies. The remuneration of executive directors may be significant, especially in large public companies, because they are also full-time employees. However, non-executive directors do not typically receive significant salaries to act in their non-executive capacity. The internal rules may also provide for the board of directors to appoint a managing director and allow the board to fix that person’s salary: s 201J, replaceable rule. Additional points to note are: • the disclosure requirements in Pts 2D.2, 2D.3 and 2D.5, which apply to both public and proprietary companies, and s 300A and further changes made by the CLERP 9 Act, which only apply to publicly listed companies; • excessive remuneration may constitute oppressive or unfair conduct under Pt 2F.1 and/or a breach of directors’ duties; and • in relation to public companies, regard must also be had to Ch 2E which deals with related party transactions.

Recent developments on directors' remuneration [13.220] Following the onset of the GFC, the Productivity Commission commissioned a report on Australia’s director and executive remuneration framework. The Productivity Commission delivered its final report on 4 January 2010 (Australian Government, Productivity Commission, “Executive Remuneration in Australia”, Report No 49 (2009)), in which it made a number of recommendations that were designed to reform and strengthen Australia’s remuneration framework. One of the proposed reforms was to provide shareholders with the ability to reject termination benefits to directors or company officers that were considered to be excessive. Other proposed reforms included: • ASX listing rules be amended to prohibit executives in the ASX top 300 listed companies from sitting or voting on their own remuneration committees; • Disclosure by institutional investors on how they voted on remuneration reports; [13.220] 627

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• Two strikes and re-election resolution process: If there is a 25% or greater no vote on adopting a remuneration report then reporting obligations will be triggered on how concerns can be addressed; • Disallow non-chair proxies from “cherry picking” the proxies they exercise, by requiring that any directed proxies that are not voted will automatically default to the Chair; and • Director or executive to repay to the company any bonuses which were based upon financial information that subsequently turned out to be materially misstated. On 27 June 2011, the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011 (Cth) received Royal Assent. The Amendment Act was introduced to implement a number of the recommendations made by the Productivity Commission. These amendments to the Corporations Act included a “two strikes and re-election” process in relation to the non-binding shareholder vote on the remuneration report. The “first strike” will ordinarily occur where shareholders vote on a company’s remuneration report and the company receives a “no” vote of 25% or more. The “second strike” occurs where a company’s subsequent remuneration report receives a “no” vote of 25% or more. Where this occurs, a “spill resolution” will need to be put before the members at the AGM to decide whether the directors will stand for re-election. If the spill resolution is approved by the members and receives 50% or more of the eligible votes cast, another meeting of the company’s shareholders known as a “spill meeting” must be held within 90 days. Another important amendment that was introduced included the use and engagement of remuneration consultants. The recent amendments to the Corporations Act provide that a company’s engagement of a remuneration committee must be approved by the board or remuneration committee. The remuneration consultant must report to non-executive directors or the remuneration committee. The remuneration consultant and the board must also make separate declarations that the recommendation on remuneration is free from undue influence.

Disclosure obligations [13.230] The disclosure requirements and limitations on directors’ remuneration are set out in Pt 2D.2 – “Restrictions on Indemnities, Insurance and Termination Payments” and Pt 2D.5 – “Public Information about Directors and Secretaries”. These provisions are intended to provide some protection for creditors and members from potential abuses by directors of the control they have over the management of a company’s affairs. Directors’ obligations include:

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• a general duty of disclosure in relation to matters affecting the company’s compliance with s 205B (discussed below) and Ch 6 (Takeovers) of the Corporations Act (ss 205C, 205F); • members’ approval of benefits is required prior to payment to directors of retirement benefits that exceed certain permitted thresholds (Pt 2D.2); • the disclosure requirements in s 300A (as amended and expanded by the CLERP 9 Act) which require public companies incorporated in Australia and listed on the ASX to include detailed information about directors’ and company executives’ remuneration in a remuneration report which is a separate and clearly identified section of the annual directors’ report, and for a non-binding shareholder vote on this report at the AGM; • preparation of a statement, if requested by at least 100 members in a company or members who are entitled to vote with at least 5% of the votes attaching to shares in the company, detailing the total emoluments and benefits paid to each of the directors of the company (s 202B); and • disclosure of their personal details (names, date and place of birth and addresses) and any changes to these details to the company, so that the company can lodge the required information with ASIC: ss 201L, 205B, 205C. • In recent times, there have been calls for greater disclosure of corporate debt by reporting entities. The use of margin loans by directors for the purpose of purchasing shares in their respective companies has become more prevalent and market volatility has increased when the directors of the companies have been margin called and forced to sell their shares. The result has led to significant falls on the share market, which in turn has exposed shareholders to losses on their investment. Further, a number of listed companies have increased their reliance on off-balance sheet financing to fund their expansion plans. Following the global credit crisis in 2008, borrowers, including listed companies, have been forced to refinance their outstanding liabilities. As the article below reports, the difficulty encountered by some borrowing entities to refinance their loan portfolios has undermined investor confidence.

Resignation or removal of directors General points [13.240] A director can resign or be removed from her or his position. A company’s internal rules or the director’s employment contract will specify the method of resignation or removal. For example: • s 203A, a replaceable rule, requires a director to give written notice of her or his resignation to the company; and • s 203C, a replaceable rule, permits a proprietary company to remove a director by passing an ordinary resolution at a company meeting. [13.240] 629

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The company’s constitution may also specify the method and duration of appointment of new directors, as well as specifying procedures for the removal of directors.

Removal of directors – public companies [13.250] Under s 203D, directors of public companies may be removed by an ordinary resolution regardless of what is stated in the constitution: see Allied Mining & Processing Ltd v Boldbow Pty Ltd (2002) 169 FLR 369. Compare this with a proprietary company, which may have a constitution that can make it more difficult to remove a director. Unlike a proprietary company director, a director of a public company cannot be removed by the other directors: s 203E. The public company must normally give two months’ notice of the company meeting at which the resolution to remove a director will be voted on: s 203D(2). Under s 203D(3) the company must provide the director with a copy of the notice of removal as soon as is practicable. The director is entitled to put her or his case to the members at the meeting. This can be achieved either by circulating a written statement (s 203D(4)(a)) or by speaking to the motion at the meeting: s 203D(4)(b).

Alteration of constitution [13.260] Directors may hold their positions under the terms of the company’s constitution – for example, “X is to hold office for 10 years from the date of appointment”. If the company wants to remove a director in these circumstances, unless it is a public company (in which case s 203D will override the constitutional provision), it is first necessary to alter the constitution by a special resolution of the company: s 136(2). If alteration or deletion of such a provision occurs, the director will lose her or his position and have no recourse to compensation unless: • the director is an executive director who has a separate contract of employment with the company; or • it can be shown that the alteration is invalid (see Gambotto v WCP Ltd (1995) 182 CLR 432) or oppressive: Pt 2F.1. These are the only actions which may enable a director to be reinstated, unless he or she were subsequently voted back in. The contract created under s 140(1)(b) would not enable a director in the above situation to seek compensation. The contract created by the constitution is subject to the statutory power to alter the constitution: Shuttleworth v Cox Brothers & Co (Maidenhead) Ltd [1927] 2 KB 9. A complication arises where a director’s separate employment contract is subject to changes in the company’s internal rules. In such a case, the director’s contract can change along with any changes to the internal rules. A prudent director would require, at least, that the contract was subject to the company’s internal rules as they existed at the time the contract was entered into. 630 [13.250]

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Disqualification from office General [13.270] A director’s tenure may be terminated early in any of the circumstances set out in Pt 2D.6 “Disqualification from Managing Corporations”. Both ASIC and the court have broad powers to disqualify directors. It is an offence for a person who is disqualified from managing a corporation to participate subsequently in the management of a corporation without being granted leave to do so by ASIC or the court: ss 206F(5), 206G. Note s 206A: SECTION 206A Disqualified person not to manage corporations (1)

A person who is disqualified from managing corporations under this Part commits an offence if: (a)

they make, or participate in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or

(b)

they exercise the capacity to affect significantly the corporation’s financial standing; or

(c)

they communicate instructions or wishes (other than advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their business relationship with the directors or the corporation) to the directors of the corporation: (i)

knowing that the directors are accustomed to act in accordance with the person’s instructions or wishes; or

(ii)

intending that the directors will act in accordance with those instructions or wishes. Note: Under section 1274AA, ASIC is required to keep a record of persons disqualified from managing corporations.

… (1B)

It is a defence to a contravention of subsection (1) if the person had permission to manage the corporation under either section 206F or 206G and their conduct was within the terms of that permission. Note: A defendant bears an evidential burden in relation to the matters in subsection (1B), see subsection 13.3(3) of the Criminal Code.

(2)

A person ceases to be a director, alternate director or a secretary of a company if: (a)

the person becomes disqualified corporations under this Part; and

from

managing

[13.270] 631

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(b)

they are not given permission to manage the corporation under section 206F or 206G.

Note: If a person ceases to be a director, alternate director or a secretary under subsection (2) the company must notify ASIC (see subsection 205B(1)).

Most of the statutory grounds for disqualification from managing corporations involve situations where a director or officer of a company has been disqualified by the court or ASIC as outlined in the following paragraphs. Apart from these grounds, a company’s internal rules may specify additional grounds for vacation of office, such as continued absence from board meetings.

Disqualification by court [13.280] The court may prohibit a person from being a director or from otherwise being involved in managing a company if, for example, that person: • is a director or officer of a company which has repeatedly breached the Corporations Act (s 206E); • has breached the Corporations Act repeatedly in their position as company officer (s 206E); • was involved in the management of two or more companies which, in the last seven years, have gone into liquidation or other external administration arrangements (s 206D); or • has breached a civil penalty provision: s 206C. A person needs the court’s permission to be a director after he or she has been convicted of certain offences (such as serious fraud or contravention of certain provisions of the Corporations Act) or if he or she (in a personal capacity) has been unable to pay his or her debts and is an undischarged bankrupt or has entered into an arrangement or composition with creditors: s 206B. These sections can be very powerful. For example, executive directors convicted of improperly using company information (s 184(3)) will, under s 206B, be unable to “manage” a company for five years (unless the court gives permission) and will commit an offence if they do so: s 206A (see Table 13.4 at [13.180]). This could effectively mean that their livelihood is taken away, in addition to any other criminal or civil consequences that flow from their breach of duty. The civil penalty provisions have traditionally been described as protective rather than punitive: see the summary of the relevant legal principles by Lindgren J in Adams v ASIC (2003) 46 ACSR 68. However, the majority judgment (6-1) of the High Court of Australia in Rich v ASIC (2004) 220 CLR 129 doubted the utility of this classification and stated clearly that a disqualification order imposed a “penalty” on the director concerned. The force of these provisions has been illustrated by three important judgments (two of which were affirmed on appeal): 632 [13.280]

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• the disqualification of Rodney Adler for 20 years and Ray Williams for 10 years (both former directors of HIH Ltd) for breaches of directors’ duties and the rules regulating financial assistance (ASIC v Adler (2002) 168 FLR 253, largely affirmed Adler v ASIC (2003) 179 FLR 1); • the disqualification of John Elliott and other directors of the Water Wheel group of companies for breach of the insolvent trading provisions (ASIC v Plymin (2003) 175 FLR 124, affirmed Elliott v ASIC (2004) 10 VR 369); and • the disqualification of Steve Vizard for breach of directors’ duties (ASIC v Vizard (2005) 145 FCR 57). On the matter of sentencing for breach of fiduciary, an interesting case study is Director of Public Prosecutions (Cth) v Northcote [2014] NSWCCA 26. The case involved an appeal from a purported manifestly inadequate sentencing of director who pled guilty to s 184(2). Garling J of the NSW Court of Criminal Appeal held that the principal offence against s 184(2) of the Corporations Act, involves “a high level of seriousness of the objective criminality. Mr Northcote personally profited by over $1 M from a deliberate pre-meditated course of conduct which extended over a lengthy period of time during which, on many occasions, he was in breach of his director’s duties” at [para 120, p 29]. Garling J said the offence committed was as “at the higher end of the range for this offence” at [para 121, p 29]. His Honour added that in such a case, “nothing less than a term of full-time imprisonment served in custody is appropriate to reflect the nature and circumstances of the offence, and a penalty of such a severity as is appropriate to the offence” at [para 127, p 30]. The sentences of the District Court of NSW were quashed and, inter alia, on the s 182(2) offence the court sentenced the respondent to 3 years and 6 months. The emphatic view to such offences was evident in Garling J’s statement “I do not discount having proper and due regard to the strong subjective circumstances involving Mr Northcote, but like so many other white collar crime offenders, these have less importance than they might in other circumstances” at [para 127, p 30].

Disqualification by ASIC [13.290] Section 206F allows ASIC to serve a notice on a director or officer disqualifying them from managing a corporation for up to five years if: • the person has been a director or officer of two or more liquidated companies in the last seven years which, on liquidation, were unable to pay their unsecured creditors more than 50 cents in the dollar (as notified to ASIC by a liquidator’s report under s 533(1)); • ASIC has already served a notice on the person requiring them to “show cause” why ASIC should not disqualify them from managing a company; and • the person has been given an opportunity to “show cause” and ASIC is satisfied that it is nevertheless appropriate to disqualify them from managing a company. [13.290] 633

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Access to information [13.300] General law provides that directors are entitled to inspect company documents to enable them to discharge their fiduciary and statutory duties properly. The Corporations Act also gives directors important, additional statutory rights of access to company information: • s 290(1) gives directors an unqualified right of access to the whole of the company’s financial records at all reasonable times and s 290(2) allows directors to apply to the court for an order authorising a person to inspect those records on their behalf: Fox v Gadsden Pty Ltd (2003) 46 ACSR 713. Any rights under s 290 are automatically lost once a director is removed from office: see Ansons Pty Ltd v Merlex Corporation Pty Ltd (2001) 162 FLR 443 and Arkin v Tridon Australia Pty Ltd (2002) 43 ACSR 610. This section may assist directors who are being prevented from properly discharging their duties because fellow directors or managers are keeping them in the dark; and • s 198F gives directors and former directors a right to inspect company books (excluding financial records) for the purpose of legal proceedings, that is, when a director is suing or being sued by the company. This right continues for seven years after a person ceases to be a director: s 198F(2). • This section is intended to ensure that directors are able to gain access to company documents that might be vital for the success of any legal proceedings by or against them. This right only applies to legal proceedings brought in the name of the director (not to proceedings in the name of the company) and is limited to company books that are material to the proceedings: see Stewart v Normandy NFM Ltd (2000) 18 ACLC 814 and Hardcastle v Advanced Mining Technologies Pty Ltd [2001] FCA 1846. • Note the case of Oswal v Burrup Fertilisers Pty Ltd (Receivers and Managers Appointed) [2013] FCAFC 9 in relation to access of certain books and records of a corporation and its parent after the appointment of receivers and managers. The case involved an in-depth discussion on statutory rights to inspect documents ss 198F, 290, 420, 421, and 1303; and common-law rights.

Summary of legislation on personal liability of directors for corporate fault [13.305] The explanatory memorandum of the Personal Liability for Corporate Fault Reform Act 2012 (Cth) states that it “aims to harmonise the imposition of personal criminal liability for corporate fault across Australian jurisdictions”. Further, it aims to: • remove personal criminal liability for corporate fault where such liability is not justified; • remove the burden of proof on defendants to establish a defence to a charge; • replace personal criminal liability for corporate fault with civil liability where a noncriminal penalty is appropriate; 634 [13.300]

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• where criminal liability is justified, to make clear the circumstances where such liability would apply. Examples of amendment: Section 188 – removed the criminal penalty, replacing it with civil penalty of up to $3000, with the possible extension to $200,000 for serious matters, matters which materially prejudice the interests or ability to pay creditors of the corporation. Section 601FC – removed the criminal liability for contravention of this section and changed penalty to a civil penalty provision. Figure 13.1: Key issues summary

DIRECTORS' DUTIES — DUTY OF CARE, SKILL AND DILIGENCE Principles Introduction [13.310] This Topic discusses directors’ duties and the legal consequences which flow from their breach. As you will soon see, these duties can also apply to other officers, apart from directors, involved in the management of the company. The duties fall into three broad categories: 1.

the duties of care, skill and diligence ; [13.310] 635

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2.

the duties of good faith and proper purpose ;

3.

the duties to avoid conflicts of interest and to provide proper disclosure.

Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act) [13.312] Part 6-4 - Duties and powers of directors and other officers and employees Division 265-1 Care and diligence – civil obligation only; Part 6-11 Division 531 –Insolvent trading of the CATSI Act. An example of a case where the duty of care, skill and diligence of an officer of the company was emphasised was in relation to Kempsey Medical Service. Extract from the ORIC’s website: http://www.oric.gov.au/publications/media-release/landmark-decisionagainst-former-ceo-kempsey-medical-service.

MR1213-16 – Landmark decision against former CEO of Kempsey Medical Service [13.314] In a landmark case the Registrar of Indigenous Corporations, Mr Anthony Beven, has today noted the judgment handed down by Justice Emmett in the Federal Court in Sydney against Mr Gerald Hoskins, former CEO of the Durri Aboriginal Corporation Medical Service (Durri). In his judgment Justice Emmett made declarations that Mr Hoskins had contravened several civil penalty provisions of the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (CATSI Act). Justice Emmett found that Mr Hoskins had not exercised due care and diligence, had not acted in good faith in the best interests of Durri and had improperly used his position as the CEO of Durri to gain an advantage for himself and another. Mr Hoskins had arranged bonus payments to himself in 2010 and 2011 totalling $202,312; charged expenses of a personal nature to his corporate credit card and approved personal payments to a related party of Durri. Durri is a not-for-profit corporation that provides essential primary and secondary health services to Aboriginal people in the Kempsey region of New South Wales. Justice Emmett ordered that Mr Hoskins be disqualified from managing an Aboriginal and Torres Strait Islander corporation for a period of 15 years. This is the first time that orders have been made by the Federal Court to disqualify an officer from managing Aboriginal and Torres Strait Islander corporations. Mr Hoskins was also ordered to pay a pecuniary penalty of $100,000 to the Commonwealth and the costs of the Registrar. “This is a very important decision,” Mr Beven said. “It sends a very clear message that officers must always act in the best interests of their corporation and its members, not their own.” “When the conduct of corporation officers doesn’t meet the required standard I will take prompt action to protect the interests of corporations and the important services they deliver.” 636 [13.312]

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The Registrar maintains a publicly available register of people who are disqualified from managing Aboriginal and Torres Strait Islander corporations. It is available on the Registrar’s website http://www.oric.gov.au. Mr Hoskins will be the first person listed on the register. In another case concerning the Bunurong Land Council, the Federal Court in Melbourne made banning orders against four directors for breach of duty of care and diligence. Extract from the ORIC’s website: http://www.oric.gov.au/publications/media-release/federal-court-bansformer-bunurong-directors

MR1415-29 – Federal Court bans former Bunurong directors [13.316] The Federal Court in Melbourne has today made banning orders against four former directors of the Bunurong Land Council (Aboriginal Corporation) in proceedings brought by the Registrar of Indigenous Corporations, Mr Anthony Beven. Justice Gordon found that the four former directors, Sonia Murray, Mervyn Brown, Leonie Dickson and Verna Nichols, had breached their duties as directors under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (CATSI Act). They were also found to have failed to meet their obligation to ensure the corporation kept proper books and records. The Bunurong Land Council (Aboriginal Corporation) was incorporated on 30 June 2000 and provides Aboriginal cultural heritage services on a fee for service basis in the outer suburbs of Melbourne. Ms Murray had sole responsibility for the day-to-day management of the corporation from 2002 until January 2014, when the Registrar placed the corporation into special administration. Justice Gordon made declarations that the directors had failed to put in place policies and practices to control and monitor the activities of Ms Murray in relation to invoicing and money handling. As a result Ms Murray intermingled the corporation’s money with money in her own personal bank accounts. The inadequate records of the corporation meant the special administrator appointed in January 2014 was unable to properly identify the source and destination of large sums of money. Ms Murray admitted that between September 2008 and January 2014 she deposited $924 000 into the corporation’s bank account and withdrew more than $929 000 from it but did not keep any record of who provided the money or to whom it was paid. Before 2014 the Bunurong Land Council (Aboriginal Corporation) had failed to comply with its meeting obligations–holding no annual general meetings for 10 years and only one directors’ meeting in five years. The corporation also failed to pay GST to the Australian Taxation Office in the financial years from 2010 to 2013 and subsequently incurred interest charges of $23 000. Justice Gordon declared that each of the former directors breached sections 265-1(1) and 363-1(1) of the CATSI Act and that in addition Ms Murray [13.316] 637

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also breached section 265-10(1). Justice Gordon ordered that Ms Murray be disqualified from managing an Aboriginal or Torres Strait Islander corporation for seven years, pay a fine of $25 000 and pay compensation of $7717.98 to the Bunurong Land Council (Aboriginal Corporation). Mr Brown and Ms Nichols were both disqualified for three years and ordered to pay a fine of $10 000. Ms Dickson was disqualified for three years and ordered to pay a fine of $5000. “The Bunurong Land Council was treated by Ms Murray as her own personal business and the other directors failed to take even basic steps to monitor what Ms Murray did and to ensure the corporation met its record keeping, meeting and taxation obligations,” said Mr Beven. “The former directors failed the Bunurong people and have demonstrated that they are not appropriate to be directors of an Aboriginal or Torres Strait Islander corporation.”

Overview of directors' duties Reason for directors' duties [13.320] Directors’ duties exist to protect shareholders from the risk of directors causing harm to the company, including any of its property or assets as well as its reputation. The risk arises because the internal rules of most companies (for example, s 198A of the Corporations Act 2001 (Cth) (Corporations Act) – a replaceable rule) vest the power to control and manage the company’s property and affairs in the board of directors. Shareholders are vulnerable to harms such as: • fraud – directors taking assets, opportunities or information belonging to the company and using it for their own personal advantage; and • mismanagement – directors risking loss or devaluation of the company’s property through incompetence and poor decision making. This can also include other company officers or even company employees who mismanage company resources. Figure 13.2: Balancing directors’ functions

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While directors’ duties reduce the temptations and/or risk of fraud or mismanagement, they also create tension between the commercial and legal expectations of directors. Commercial expectations focus on the financial performance of the company. They dictate that directors, from time to time, make decisions which involve some risk of commercial failure. Directors’ duties can act as a restraint on risk taking. They discourage directors from making decisions without considering whether those decisions satisfy their duties as directors. A balance is needed between the two concerns.

Debate [13.330] Community concerns about the corporate collapses of the 1980s (such as Qintex, Tricontinental and the National Safety Council) led to law reforms imposing more stringent legal duties on directors. During the 1990s some commentators argued that the balance was weighted too much in favour of legal compliance, at the expense of company performance. The introduction of a statutory business judgment rule, and other reforms put in place by the Corporate Law Economic Reform Program Act 1999 (Cth) (CLERP Act) in March 2000, were intended to redress that perceived imbalance. Despite these reforms, the corporate collapses have continued into the 2000s (for example, HIH and One.Tel). The fate of HIH led to the Commonwealth government establishing a Royal Commission to inquire into the circumstances of its collapse. The recommendations made in the Report of the HIH Royal Commission formed a major part of the reforms made by the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (Cth) (CLERP 9 Act) that came into force on 1 July 2004: see [1.130] (Yogaratnam). Following the HIH Royal Commission, the Corporations and Markets Advisory Committee (CAMAC) released a discussion paper (May 2005) and “Corporate Duties Below Board Level Report” (April 2006). In the Report, CAMAC makes a number of wide-ranging recommendations, including the recommendation to extend the present directors’ duties (including the duty of good faith under s 180) beyond directors and company officers to “any other person who takes part, or is concerned, in the management of that corporation”: CAMAC “Corporate Duties Below Board Level Report” (April 2006), Recommendation 1. To date, the recommendation has not been enacted in the Corporations Act. The debate about the extent of legal regulation of companies reflects a concern that people who are most well-informed about their legal responsibilities may become reluctant to take on the role of a director for fear of personal liability. Indeed, in a recent article published in the Australian Financial Review a number of Australia’s leading directors have called on the new Labor government to reform the Corporations Act with the aim of extending the business judgment rule defence for directors. Experience also suggests that the imposition of more rigorous legal duties will not necessarily be more effective in protecting shareholders from the harms outlined at [13.330] 639

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[13.320] and will not automatically result in the reduction of the number of corporate failures. A related problem is that it is difficult to have clearly defined directors’ duties because of the diverse nature of companies – what may be expected of a non-executive director of a large, public, listed company can be irrelevant or inappropriate for a sole director of a small family business. Directors of different sized companies may also have different levels of skill and experience: see generally Farrar J Corporate Governance Theories, Principles and Practice (3rd ed, OUP, 2008).

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Figure 13.3: Overview of duties of directors

Why directors owe duties of loyalty and good faith [13.340] Directors owe duties of good faith and loyalty because they are in a “fiduciary relationship” with their company: Elders Trustee and Executor Co Ltd v E G Reeves Pty Ltd (1987) 78 ALR 193. A precise definition of a fiduciary [13.340] 641

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relationship does not presently exist. A useful starting point for the essential elements of what constitutes a fiduciary relationship was provided by the High Court of Australia in the case of Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 68. The High Court stated that a fiduciary relationship arises when: “one person is obliged, or undertakes, to act in relation to a particular matter in the interests of another and is entrusted with the power to affect those interests in a legal and practical sense”, [and where there is a] “…special vulnerability of those whose interests are entrusted to the power of another”

Thus, in broad terms, a fiduciary relationship exists: • where a person (in this case, a director) is appointed to or assumes to act; • for the benefit of another person (that is, the company – in most circumstances this means the general body of members); or • in circumstances where the appointment gives the appointed person powers which could be exercised to the detriment of the other person (in this case, the company).

Outline of duties of loyalty and good faith [13.350] As fiduciaries, directors must show special qualities of good faith, fairness and loyalty when they exercise the discretions and powers of their office. They cannot take advantage of their position of trust to benefit themselves at the company’s expense, except with the company’s full knowledge and consent. The duties of good faith and loyalty can be broken down into four overlapping subduties which will be discussed in further detail in this Topic. They are: • the duty to act in good faith in the interests of the company as a whole; • the duty to exercise one’s powers for proper purposes as opposed to improper or collateral purposes; • the duty not to fetter one’s discretion; and • the duty to avoid actual or potential conflicts between one’s personal interests and those of the company.

Outline of duties of care, skill and diligence [13.360] The second group of duties owed by directors comprises the duties of care, skill and diligence. They are discussed in detail later in this Topic. There are two subduties: • the duty to exercise reasonable care, skill and diligence in the performance of the functions and the exercise of the powers which form part of the director’s office; and • the duty to prevent insolvent trading by the company. The duty of care, skill and diligence owed by directors is analogous to the duty of care owed by all people in the exercise of their profession, trade or other 642 [13.350]

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employment. However, for directors, this duty is now balanced by the statutory business judgment rule. The duty to prevent insolvent trading can be viewed as a specialised application of the broader duty of care and diligence.

Who must perform the duties? Source of duties [13.370] The duties of good faith and loyalty, and care, skill and diligence arise under: • the general law; and • Pt 2D.1 of the Corporations Act. The language used to describe those duties in Pt 2D.1 differs from the language used by case law to describe the general law duties. Despite these differences, the general law and statutory duties are very similar.

Directors and Officers [13.380] This Topic discusses the duties of good faith and loyalty, care, skill and diligence and avoidance of conflicts of interest as they apply to directors. It is important to realise that the duties may also apply to other officers of a corporation. The duties in Pt 2D.1 are owed by “directors, secretaries, other officers and employees of a corporation”: s 179(1). In relation to non-executive directors, in Morley v ASIC (2010) 81 ACSR 285; [2010] NSW CA 331, the court found a breach of s 180(1) for failing to advise the board of the requirement to disclose pertinent material to the ASX in relation to the fund to compensate asbestos victims. The terms “director” and “officer” are defined in s 9 to include “shadow” and “de facto” directors and officers. SECTION 9 (ABRIDGED) DICTIONARY “Officer” of a corporation means: (a)

a director or secretary of the corporation; or

(b)

a person: (i)

who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or

(ii)

who has the capacity to affect significantly the corporation’s financial standing; or

(iii)

in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attached to the person’s [13.380] 643

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professional capacity or their business relationship with the directors or the corporation); or (c)

a receiver, or receiver and manager, of the property of the corporation; or

(d)

an administrator of the corporation; or

(e)

an administrator of a deed of company arrangement executed by the corporation; or

(f)

a liquidator of the corporation; or

(g)

a trustee or other person administering a compromise or arrangement between the corporation and someone else.

Note: Section 201B contains rules about who is a director of a corporation.

Like the definition of director, the definition of officer includes any person who makes decisions affecting the corporation’s business or on whose instructions the board is accustomed to act. It does not matter whether or not the person is a director of the corporation or the person’s job description or title suggests that he or she is involved in management. In ASIC v Adler (2002) 168 FLR 253 at [75] Santow J held that Rodney Adler was an “officer” of HIHC (a wholly owned subsidiary of HIH), even though he had not been appointed as a director or secretary of HIHC. Adler was a director of HIH and, as such, he was a person who made or participated in making decisions affecting the whole or a substantial part of the business of HIHC (s 9(b)(i)) and also had the capacity to affect significantly HIHC’s financial standing (s 9(b)(ii)).

Proposals for reform: Extend directors' duties to other persons? [13.390] Following the HIH Royal Commission, CAMAC in its “Corporate Duties Below Board Level Report” (April 2006) recommended that the current directors’ duties (including the duty to act in good faith under s 180) be extended beyond directors and company officers to “any other person who takes part, or is concerned, in the management of that corporation”: CAMAC, “Report on Corporate Duties Below Board Level” (April 2006), Recommendation 1. CAMAC also recommended that the duties under ss 181, 182, 183 and 184 (see ([13.850]) and ([13.1130])) should also be similarly extended: Recommendations 1, 2, 7 and 8. CAMAC claims that extending directors’ duties beyond directors and company officers is justified and consistent with the HIH Royal Commission’s findings namely, that “all general duties imposed by Ch 2D of the Corporations Act should be imposed on directors, secretaries and the wider class of personnel encompassed within the functional definition [defined by reference to a person’s role in a corporation, rather than by that person’s formal status].” CAMAC’s functional approach of extending duties to a wider class of individuals involved in undertaking managerial functions and 644 [13.390]

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responsibilities is reflected in the nature of the modern corporation, where employees and even contractors may undertake day-to-day management functions. Moreover, the modern concept of “management” has moved beyond traditional and conventional roles, where company boards are less involved in day-to-day management and greater reliance is placed on delegates and intermediate executives to undertake management functions. To date, the recommendations made by CAMAC have not been enacted in the Corporations Act.

To whom are the duties owed? [13.400] Directors do not owe their duties to individual members: Percival v Wright [1902] 2 Ch 421. Instead, the duties are owed to the company as a whole: Mills v Mills (1938) 60 CLR 150. However, recent cases concerning the duties of good faith and loyalty have eroded this principle by, in some special circumstances, extending the duties to members, creditors and beneficiaries of trusts..

Legal consequences of breaching duties Outline [13.410] The consequences for directors and officers who breach their duties depend on: • the particular duty breached; • the person who takes action in relation to the breach of duty; and • the sanctions imposed by the court for breach of duty.

Particular duties breached [13.420] A legal action against a director for breach of her or his duties may be brought under either: • the general law; or • Pt 2D.1 of the Corporations Act; or • both (that is, a director may be sued for breach of both general law and statutory duties in the same proceeding). Evidence of a breach of a statutory duty is probably sufficient in most circumstances to prove a simultaneous breach of the equivalent general law duty. It is, therefore, quite common for a director to be sued under the Corporations Act and alternatively under the general law for breaches of directors’ and fiduciary duties.

Person taking action [13.430] A director who breaches her or his duties may be sued by: • the company; • a liquidator, whilst acting on behalf of the company; [13.430] 645

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• a creditor, but only in the special circumstances discussed later in this Topic at ([13.850]); • a shareholder; and • ASIC.

An observation Can misleading and deceptive statements made to the ASX in contravention of s 1041H(1) trigger a contravention of s 180(1)? [13.435] The Court held in Australian Securities & Investments Commission v Citrofresh International Ltd (No 2) (2010) 77 ACSR 69 (Liability Decision), where misleading and deceptive statements are made to the ASX in contravention of s 1041H(1), in “appropriate circumstances” will trigger a contravention of s 180(1). “Appropriate circumstances” may be where the company has been placed in jeopardy due to a contravention of the Corporations Act with little or no “countervailing potential benefit of any significance to the company”. Such jeopardy covers share price fluctuations, legal proceedings due to contraventions of the CA, the imposition of civil penalties under the CA and the loss of reputation in relation to such proceedings. See also Australian Securities & Investments Commission v Maxwell [2006] NSWSC 1052; Australian Securities & Investments Commission v Warrenmang Ltd [2007] FCA 973. Expected standard of “lay” directors is to apply “a considerable amount of skill and care” especially when in the position of Managing Director and CEO. Reliance on “external advisors” only relevant where those advisers are experts in the subject matter of the statements. Summary

Citrofresh International Ltd under the direction of the second defendant, Managing Director and CEO, Ravi Narain, caused two letters to be sent to the Australian Stock Exchange company announcements office. ASIC alleged those letters were “misleading and deceptive in a number of respects and contained misrepresentations”, in contravention of s 1041H(1). The statements related to the company’s development of a product/s which would “now offer a global solution to reduce and eventually stop the spread of [HIV]”, “provide a nonhazardous, non-toxic and effective solution that deal [sic] with emergency disease control and prevention”, “market a range of ‘barrier protection’ products to be used in the first instance for Men’s Health (post intercourse spray or lotion)”, “postcoital application will act as an ‘invisible condom’ for the prevention of STDs” and “postcoital application will have a significant impact on reducing transmission of HIV…”. This was the rehearing of an earlier case (Australian Securities & Investments Commission v Citrofresh International (2007) 164 FCR 333), in which, Goldberg J found that “the statements in the letters were not statements in relation to a financial product or service causing s 1041H to be inapplicable, as there must be some ostensible connection or relationship on the face of the conduct” with 646 [13.435]

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the financial product or service. Goldberg J further found that Narain did not contravene s 1041H as he was not personally liable for sending the letters to the ASX. ASIC appealed the decision to the full court (Australian Securities & Investments Commission v Narain (2008) 169 FCR 211) which allowed the appeal, finding that the letters which contained the statements related to shares in Citrofresh therefore making them “in relation to a financial product or service” and that Narain was personally liable for their publication. The full court remitted the matter to the primary judge to determine if the content of the letters was misleading and if a contravention of s 1041H had occurred, was there are also a contravention of s 180. Expert evidence was led that the statements were not backed up by scientific evidence. Goldberg J found that the letters were “misleading and deceptive” due to the “nondisclosure” inter alia that further testing was necessary before such statements could be made. The court held that Narain contravened s 1041H(1) and that he caused Citrofresh to make the same contravention. On determining whether misleading statements would result in a contravention of s 180(1), Goldberg J stated that “not every misleading statement made by a director on behalf of a company results in a contravention of s 180(1)” (see also Australian Securities & Investments Commission v Warrenmang Ltd [2007] FCA 973). “Much depends on the degree and extent of the misleading nature of the statement and its falsity.” Both ASIC and Narain sought to rely on [110] from Australian Securities & Investments Commission v Maxwell [2006] NSWSC 1052: Generally speaking, therefore, ss 180, 181 and 182 do not provide a backdoor method for visiting, on company directors, accessorial civil liability for contraventions of the corporations act in respect of which provision is not otherwise made. This is all the moreso since the Corporations Act makes provision for the circumstances in which there is to be accessorial civil liability. Whether there were in this case breaches of the directors duties – and, in particular, of their duty of care and diligence – depends upon an analysis of whether and to what extent the corporation’s interests were jeopardised, and if they were, whether the risks obviously outweighed any potential countervailing benefits, and whether there were reasonable steps which could have been taken to avoid them.

ASIC argued that exposing Citrofresh to a contravention of s 1041H and the jeopardy the company was placed in following the misleading statements were actions that “failed to exercise a degree of care and diligence that a reasonable person acting as a managing director and chief executive officer” would have exercised. Narain argued that the above paragraph demonstrates that courts should not use ss 180 – 182 as a mechanism to expose directors to civil penalties which would normally not be available in relation to a contravention of s 1041H. The court disagreed with Narain, finding instead that Citrofresh was placed in jeopardy because of the misleading statements and there was no [13.435] 647

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“countervailing potential benefit of any significance to the company in him so doing”. Goldberg J again quoted Brereton J in Maxwell [104]: There are cases in which it will be a contravention of their duties, owed to the company, for directors to authorise or permit the company to commit contraventions of provisions of the Corporations Act. Relevant jeopardy to the interests of the company may be found in the actual or potential exposure of the company to civil penalties or other liability under the act, and it may no doubt be a breach of a relevant duty for a director to embark on or authorise a course which attracts the risk of that exposure, at least if the risk is clear and the countervailing potential benefits insignificant…

Narain also submitted that; his actions were not taken for personal gain; he sought advice and assistance from external advisors; he sought a trading halt on the ASX as soon as he observed the “market reaction” to the statements; he did not act dishonestly; and that he was not a professional director, instead having a background in abalone processing. The court found that the “external advisors” from which Narain had sought advice were not “experts” with technical or scientific qualifications or experience on which could be relied upon when making the statements. The “external advisors” were experienced in corporate structures, business strategies, marketing et cetera, making it unreasonable to rely on them for scientific or technical matters. Instead, the court found that Narain should have exercised “a considerable amount of skill and care” which required him to have “an active participation in the drafting”, also heightened by his position as both Managing Director and CEO. His background in abalone processing did not excuse him from applying “the appropriate degree of skill and care required of a company director”. Narain was found to have contravened ss 1041H(1) and 180(1). Matters in relation to s 1317G (pecuniary penalty) and s 206C(1) (disqualification) were heard at a later date.

Sanctions for breach [13.440] Both the general law and the Corporations Act provide for the court to make orders against a director committing a breach of a directors’ duty. These orders are of two broad kinds: • remedies; and • penalties. Remedies, as the name suggests, are court orders whose object is to correct or remedy the state of affairs caused by the breach of duty. Penalties are orders made by the court or administrative orders made by ASIC (for example, a management banning order under s 206F) whose object is to punish or penalise the person committing the breach. Penalties can only be ordered in relation to breach of statutory duties. In order to strengthen the enforcement of the legislation, the CLERP 9 Act introduced new provisions to protect 648 [13.440]

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“whistleblowers” (such as officers or employees of a company) who report breaches, or suspected breaches, of the Corporations Act to ASIC, from victimisation by the company: see Pt 9.4AAA.

Remedies – general law and statute [13.450] The tables below summarise the general law and statutory remedies available to companies who sue directors for breach of directors’ duties under the general law and/or the Corporations Act – note, these remedies are sometimes described as civil remedies, that is, non-criminal. In relation to the general law duties, you will see that the remedies depend on whether the duty breached derives from equity or common law principles. The duties of loyalty and good faith derive from principles of equity, so only equitable remedies are available if those duties are breached. The general law duty of care, skill and diligence derives from both equity and common law principles: Permanent Building Society Ltd (in liq) v Wheeler (1994) 12 ACLC 674 at 680 per Ipp J (other judges agreeing). If that duty is breached, a choice can be made between equitable and common law remedies.

Table 13.5: Remedies for breaches of general law duties Remedy Common law damages

Definition Compensation for breach of: • duty of care, skill and diligence • other duties where breach involves fraud.

Case Examples Daniels v Anderson (1995) 37 NSWLR 438

Similar to common law damages but Markwell Bros Pty Ltd v CPN Diesels for duties deriving from equitable (Qld) Pty Ltd [1983] 2 Qd R 508; principles. O’Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262; Digital Pulse Pty Ltd v Harris (2002) 166 FLR 421; on appeal Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298 Account of profits Where company suffers no loss but Regal (Hastings) Ltd v Gulliver [1942] (equity) directors make profits – order to 1 All ER 378 disgorge profits made from breach. Rescission* Getting out of an unfavourable Transvaal Lands Co v New Belgium (common law and contract, where director has (Transvaal) Land & Development Co equity) undisclosed interest in contract. [1914] 2 Ch 488; Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 Cook v Deeks [1916] 1 AC 554; Declaration of Court order returning property trust (equity) acquired by director in breach of Guinness plc v Saunders (1990) 8 duty to company. Court declares ACLC 3061 that the director holds the property as trustee for the company. Termination Termination of director’s contract of employment where breach amounts to serious misconduct.

Equitable compensation or damages

* A company’s right to rescind a contract might be lost if an outsider (that is, a party independent of the company and the director) is also a party to the contract.

[13.450] 649

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Table 13.6: Remedies for breaches of statutory duties Remedy Injunctions and damages

Requirements Contravention or suspected contravention of Corporations Act

Corporations Act s 1324 – action can be brought by any person “affected by contravention”

Compensation

• Under insolvent trading (see below) • In relation to an alleged breach of civil penalty provisions in Corporations Act

• s 588M – action by liquidator

Court examination of director and remedial orders

Directors suspected of fraud and/or breaches of duties

• ss 596A, 596B or 597 – court examination at request of liquidator or other eligible applicant • s 598 – remedial orders

Oppression remedies/ winding up

Where no action taken against directors by company despite breaches of Pt 2D.1

• Pt 2F.1 – oppression action shareholders bring action

• s 1317H: action by company or liquidator

• s 461(1) – winding up

Penalties – under statute only [13.460] Penalties can be ordered against a director who breaches her or his statutory duties: ss 180 – 183 and 588G. There are two kinds of penalties available, depending on the circumstances in which the breach took place: • civil penalties; and • criminal penalties.

Civil penalties [13.470] Civil penalties can be imposed against a director who breaches the abovementioned statutory duties. For this reason, the statutory duties are called civil penalty provisions. The types of civil penalties are described in the following table. Note: only ASIC can bring civil penalty cases against directors. A director can be subject to an application by ASIC seeking the imposition of civil penalties and can be sued for remedies by the company or others in relation to the same breach of statutory duty. These are civil proceedings but because the orders that may be made (disqualification or a pecuniary penalty) involve the imposition of a “penalty”, a defendant may claim privilege in response to an application for discovery of documents: Rich v ASIC (2004) 220 CLR 129. Since the proceedings for civil penalties are civil in nature, the burden of proof required is that of the civil standard – the balance of probabilities – and the double jeopardy rule (that defendants cannot be tried twice for the same offence) does not apply. However, the Crown may also bring criminal proceedings against a person for conduct that is substantially the same as conduct in respect of which orders had already been made for contravention of a civil penalty provision: s 1317P; and see Adler v DPP (Cth) 650 [13.460]

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(2004) 149 A Crim R 378. If the Director of Public Prosecutions is of the view that criminal proceedings are warranted against a director or company officer, the burden of proof is that of the criminal standard – that is, beyond a reasonable doubt – and the double jeopardy rule will apply. Two recent decisions from the Supreme Court of Victoria have found directors to be in breach of their duties, following investigations from ASIC. The first related to the involvement of the former managing director of AWB Limited and the latter, the Chief Financial Officer of AWB Limited. In both instances the Court found that managing director and the CFO had contravened s 180(1) of the Corporations Act. Former AWB Managing Director Found to have Breached his Duties [13.471] ASIC Media Release 12-191MR, 9 August 2012 The Supreme Court of Victoria today ordered that Andrew Alexander Lindberg, the former Managing Director of AWB Limited (AWB), pay a pecuniary penalty of $100,000 and be disqualified from managing corporations until 14 September 2014 after finding that he breached his duties as a director of AWB. In May 2012 Mr Lindberg admitted to four contraventions of section 180(1) of the Corporations Act 2001 arising from AWB’s supply of wheat to Iraq under the United Nations Oil-for-Food Programme and subsequent inquiries conducted by AWB in relation to that supply (refer: 12-109MR). The penalties imposed by the Court reflect the joint submission made by ASIC and Mr Lindberg as to the appropriate penalty for the admitted contraventions. Handing down his decision this morning, Justice Robson said that the contraventions did not involve deliberate wrongful acts, dishonesty or any moral turpitude but that Mr Lindberg had nonetheless “failed to perform his duties as a reasonable director or officer would in his situation”. ASIC Chairman Greg Medcraft said the outcome today is a reminder of the requirements for proper corporate governance. “Good corporate governance requires executive directors to make adequate enquiries in relation to matters before them and properly inform the Board,” Mr Medcraft said. © Australian Securities & Investments Commission. Reproduced with permission.

Former AWB Chief Financial Officer Found to have Breached Duties [13.475] ASIC Media Release 12-192MR, 10 August 2012 ASIC notes the decision of Justice Robson of the Supreme Court of Victoria in the matter of Paul John Ingleby, the former Chief Financial Officer of AWB Limited (AWB). Justice Robson found that Mr Ingelby had contravened section 180(1) of the Corporations Act 2001 (Corporations Act) and ordered that he be disqualified from managing corporations until 31 December 2012 and pay a pecuniary

[13.475] 651

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penalty of $10,000. Both ASIC and Mr Ingleby had recommended penalties of a disqualification of 15 months and a pecuniary penalty of $40,000. In June 2012, Mr Ingleby admitted contravening the Corporations Act by failing to act upon information available to him to ascertain whether or not inland transport fees were ultimately paid to the government of Iraq arising from AWB’s supply of wheat to Iraq under the United Nations Oil-for-Food Programme (see 12-126MR). © Australian Securities & Investments Commission. Reproduced with permission.

Table 13.7: Penalties for breach of civil penalty provisions [13.480] Type of Orders Management banning order

Requirements

Pecuniary penalty up to $200,000

• Civil penalty contravention. • Order only to be made where contravention materially prejudices the interests of the corporation, its members, its ability to pay its creditors, or is serious.

• Civil penalty contravention. • Order to be made if satisfied that disqualification is justified.

Pay compensation Loss is suffered because of to corporation contravention of civil penalty provision.

Corporations Act ss 206C, 1317E; see also ASC v Donovan (1998) 28 ACSR 583; ASIC v Adler (2002) 168 FLR 253 (largely affirmed on appeal Adler v ASIC (2003) 179 FLR 1); and ASIC v Plymin (2003) 175 FLR 124 (affirmed on appeal Elliott v ASIC (2004) 10 VR 369) ss 1317E and 1317G; see also ASIC v Adler (2002) 168 FLR 253 (largely affirmed on appeal Adler v ASIC (2003) 179 FLR 1); and ASIC v Plymin (2003) 175 FLR 124 (affirmed on appeal Elliott v ASIC (2004) 10 VR 369) s 1317H; see also ASIC v Adler (2002) 168 FLR 253 (largely affirmed on appeal Adler v ASIC (2003) 179 FLR 1); and ASIC v Plymin (2003) 175 FLR 124 (affirmed on appeal Elliott v ASIC (2004) 10 VR 369)

The effectiveness of these penalties is clearly illustrated in the following case. Case study ASIC v Adler (2002) 168 FLR 253 (largely affirmed on appeal)

[13.490] FACTS: On 15 June 2000, HIH Casualty & General Insurance Limited (HIHC), a wholly owned subsidiary of HIH Insurance Limited (HIH), advanced $10 million to Pacific Eagle Equity Pty Ltd (PEE), a newly registered company controlled by Rodney Adler. Adler was a non-executive director of HIH (but not a director of HIHC). The advance was supposed to be used in making profitable investments for HIHC. This payment was made at Adler’s request and organised by Williams (the CEO of HIH) and Fodera (the finance controller) without any documentation and without the knowledge of the other directors of HIH. 652 [13.480]

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During the next two weeks PEE bought $3.9 million worth of shares in HIH on the stockmarket. In early July 2000, Australian Equities Unit Trust (AEUT) was formed with PEE as its trustee. In August and September 2000 AEUT bought shares in unlisted technology and internet companies from Adler Corporation (controlled by Rodney Adler and his wife) resulting in a loss of $3.8 million. Later in 2000 AEUT made unsecured loans of more than $2 million without adequate documentation to companies and funds associated with Adler: see diagram of the facts at [13.1370]. After the collapse of HIH, ASIC brought civil penalty proceedings against Adler, Williams and Fodera alleging breaches of directors’ duties, including:

• s 180(1) (duty of care and diligence); • s 181 (duty to act in good faith and for a proper purpose: see ([13.880])); and

• ss 182 – 183 (improper use of position and improper use of information: see ([13.1130])). Other allegations included:

• contravention of the provisions regulating related party transactions (Ch 2E): see

• ([13.1130]); and • contravention of the provisions regulating financial assistance (Pt 2J.3). DECISION: ASIC’s application was successful and Santow J made the following orders:

• Disqualification: Adler was banned from acting as a director of a company for 20 years and Williams was banned for 10 years.

• Pecuniary penalties: Adler Adler Corporation Williams Fodera

$450,000 $450,000 $250,000 $5,000

• Compensation to HIHC Adler, Williams and Adler Corporation were ordered to pay HIHC total compensation of $7,986,402. (Appeals by Adler and Williams were largely unsuccessful: see Adler v ASIC (2003) 179 FLR 1.)

Another illustration is ASIC v Plymin (2003) 175 FLR 124 (affirmed on appeal Elliott v ASIC (2004) 10 VR 369) in which the former directors of the Water Wheel group of companies (including well known businessman, John Elliott)

[13.490] 653

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were ordered to pay pecuniary penalties, compensation to the companies and were disqualified from acting as a director for varying terms for breach of the insolvent trading provisions: s 588G.

Criminal penalties [13.500] In the most serious cases, the Crown may bring criminal charges against directors, regardless of the fact that civil penalty orders have already been made in respect of substantially the same conduct that is the subject of the criminal charges: s 1317P. In Adler v DPP (Cth) (2004) 149 A Crim R 378 Rodney Adler argued unsuccessfully that criminal proceedings against him should be permanently stayed as an abuse of process because he had already been punished for the same conduct in the civil penalty proceedings: see ASIC v Adler (2002) 168 FLR 253. The New South Wales Court of Criminal Appeal held that launching the criminal prosecution was not an abuse of process, noting that the criminal offences differed in important respects to the causes of action in the civil proceedings (leave to appeal to the High Court from this decision was refused on 10 December 2004). Criminal penalties can be imposed against a director or company officer who breaches ss 184 or 588G(3) in the circumstances described in the next table. In Kwok v The Queen (2007) 64 ACSR 307, the New South Wales Court of Criminal Appeal imposed a sentence of 18 months periodic detention for a breach of directors’ duties under s 184 of the Corporations Act. In sentencing the defendant director the Court reaffirmed that the purpose of sentencing was to provide both general and personal deterrence for intentionally breaching directors’ duties. In relation to the element of “dishonesty” in s 184 the Court of Criminal Appeal in Kwok applied the reasoning of the High Court in Peters v R (1998) 192 CLR 493 at 504, where the High Court stated that the meaning of “dishonesty” is to be determined according to the ordinary notions of what the community would regard as dishonest, judged by a jury who decide by reference to “the standards of ordinary decent people.”

Table 13.8: Criminal penalties Directors' Duty s 184(1)

Breach of Duty Required yes

s 184(2)

yes

s 184(3)

yes

s 588G(3)

yes

654 [13.500]

Additional Element Recklessly or intentionally dishonestly failing to act in good faith and for a proper purpose. Dishonestly and intentionally or recklessly misusing position. Dishonestly and intentionally or recklessly misusing information. Dishonestly failing to prevent insolvent trading.

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Directors and Officers

Duty of care, skill and diligence Description of duty [13.510] You will recall that a director owes the company a duty to exercise reasonable care and skill in the performance of the functions and the exercise of the powers of a director: Daniels v Anderson (1995) 37 NSWLR 438 at 501 per Clarke and Sheller JJA. The director’s duty of care arises under: • the director’s contract of employment (if any); • the general law; and • s 180(1) of the Corporations Act.

Contract of employment: executive and non-executive directors [13.520] An executive director is a director employed by a company under a contract of service. A non-executive director does not normally have a contract with the company. Typically, an executive director is a full-time employee of the company and is generally involved in the day-to-day management of the company. A non-executive director is not generally employed full time by the company and is instead required to provide an independent view in board meetings. A term of the executive director’s employment contract will be a requirement that the director, as an employee of the company, exercise the care, skill and diligence expected of a person who occupies that position. The term will either be expressly agreed to or implied by operation of law: Lister v Romford Ice and Cold Storage Co Ltd [1957] AC 555; Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187 at 287-288; ASIC v Adler (2002) 168 FLR 253 at 347 [372(5)]; ASIC v Vines (2003) 182 FLR 405.

General law (common law and equitable) duties [13.530] A director owes a duty of care, skill and diligence: • under the law of tort (part of the common law); and • in equity. There is no substantial difference between the equitable and common law duties: Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392 at 435. Evidence which proves that a director breached her or his common law duty of care should also be sufficient to prove a simultaneous breach of the equitable duty of care. However, the distinction between common law and equitable duties remains important because the remedies available for breach of the two duties differ.

Statutory duty [13.540] The statutory duty of care and diligence is set out in s 180(1).

[13.540] 655

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SECTION 180(1) Care and diligence – civil obligation only Care and diligence – directors and other officers A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they: (a)

were a director or officer of a corporation in the corporation’s circumstances; and

(b)

occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

Note: This subsection is a civil penalty provision (see s 1317E).

Section 180(1) uses the words “care and diligence” rather than the “care, skill and diligence” formula of the general law. Under s 180(1), the standard of care required by a director or officer is assessed by reference to: • the company’s circumstances; • the position and responsibilities of the director or officer within the company; and • the experience of the director or officer in question. The requirement under s 180(1) that a director or officer must exercise their powers in accordance with that of a reasonable person has ordinarily imposed an objective standard for the director or company officer to satisfy. Despite differences of expression, the duties of care imposed by s 180(1) and by the general law are similar. It appears that the requirement of “care and diligence” in s 180(1) assumes or implies a requirement of skill as well: Vrisakis v ASC (1993) 9 WAR 395 at 172 per Malcolm CJ, cited with approval in Daniels v Anderson (1995) 37 NSWLR 438 at 500 per Clarke and Sheller JJA; and South Australia v Clark (1996) 66 SASR 199 at 1,035-1,036; see also ASC v Donovan (1998) 28 ACSR 583; Circle Petroleum (Qld) Pty Ltd v Greenslade (1998) 16 ACLC 1577; ASIC v Adler (2002) 168 FLR 253 at [372]-[375]; ASIC v Rich (2003) 174 FLR 128 at [40]-[43]; ASIC v Vines (2003) 48 ACSR 282 at [20]-[21]; and ASIC v Australian Investors Forum (No 2) (2005) 53 ACSR 305. For the purposes of this Topic, “care”, “skill” and “diligence” will be treated as overlapping requirements applying to both the general law and statutory duties of care.

Overlap between general law and statutory duties [13.550] While the duties of care owed by directors under general law and s 180(1) are substantially similar in meaning and effect, there are some differences between them. The main differences are summarised in the following table.

656 [13.550]

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Directors and Officers

Table 13.9: General law versus statutory duties of care [13.560] Factors Who owes duty Content of duty

Breach of duty

Consequences of breach

General Law (Common Law and Equity) Owed by directors and senior executive officers.

Corporations Act

(s 180(1))

Owed by directors and officers (s 9 – “officer”). Duty to act with care and skill. Duty to act with care and diligence. Recent cases indicate that this also implies a requirement of skill, so the content of the duties is the same. There must be evidence of: Evidence of a breach of duty is sufficient. • a breach of duty and • damage suffered by the company. Don’t have to prove that the breach caused damage to the company but a case where there is no damage would be very rare. Differences in measure of compensa- • Civil penalties if proceedings tion between common law brought by ASIC. (damages) and equity (compensation • No criminal penalties for breach, or account of profits). cf other duties • General law remedies available to the company.

The scope of the duty of care General [13.570] To determine whether a director has complied with or breached her or his duty of care, it is necessary to compare the director’s actual conduct against the standard of conduct expected of the director by the director’s duty of care. If the director’s conduct is either the same as or above the standard required by the law, no breach of duty has taken place. Where the director’s conduct falls short of the required standard, a breach of duty occurs and serious consequences may result.

Leading Australian authority on duty of care [13.580] The leading Australian case is AWA Ltd v Daniels (generally referred to as “the AWA case”). The New South Wales Court of Appeal re-examined the requisite standard of care for the duty of care, skill and diligence in the case of Vines v Australian Securities & Investments Commission (2007) 62 ACSR 1. Recently, the High Court applied the duty in the context of an ASX announcement that was deemed to be misleading and approved by the board of James Hardie Ltd: Australian Securities & Investments Commission v Hellicar [2012] HCA 17. All three decisions are discussed below.

[13.580] 657

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Case study AWA Ltd v Daniels (1992) 10 ACLC 933; on appeal Daniels v Anderson (1995) 37 NSWLR 438 (New South Wales Supreme Court and Court of Appeal)

[13.582] FACTS: AWA Ltd (AWA) lost nearly $50 million as a result of foreign exchange (FX) transactions. The board of directors had decided to go into FX trading to protect the company against fluctuations in foreign currency between the time that it placed orders with overseas suppliers and the date the product was delivered and paid for. The board laid down the general policy to be followed and appointed Koval to manage these operations. Figures given to the board indicated that the FX trading was very profitable. However, these figures did not show the company’s real exposure to possible losses and did not reveal that substantial losses had already occurred and had been concealed by Koval. AWA’s management had failed to implement the policy laid down by the board requiring proper internal records and control mechanisms. Koval was operating without supervision and was able to conceal the true position from the board for more than two years. During this time, AWA’s auditors conducted two audits (Daniels was the responsible partner) but neither the figures given to the board nor the auditors’ reports disclosed the true picture. The evidence showed that Daniels was aware of the defects in AWA’s system of internal controls but, although he mentioned this to the CEO (who was also the Chairman) and to senior management, this warning was not passed on to the board. After the true position finally became apparent, AWA sued the auditors for negligence on the basis of their failure to bring the defects in the internal control systems to the board’s attention. The auditors denied liability and claimed that AWA had been contributorily negligent. The auditors also alleged that both the full-time executive director, Hooke (who was chairman and managing director), and the non-executive directors had been negligent. DECISION: Both Rogers CJ, at first instance, and the Court of Appeal held that the auditors had been negligent and AWA (and Hooke) was contributorily negligent. Both rejected the claims of negligence against the non-executive directors and held that they had not breached their duty of care, skill and diligence to the company. However, the majority judgment in the Court of Appeal (Clarke and Sheller JJA) adopted a more rigorous approach, imposing more stringent standards on directors than Rogers CJ at first instance.

Case study Vines v Australian Securities & Investments Commission (2007) 62 ACSR 1 (New South Wales Court of Appeal)

[13.584] FACTS: Vines was the Chief Financial Officer of GIO Australia Holdings Ltd (“GIO”), a company listed on the ASX. On 25 August 1998, a hostile takeover bid for the shares in GIO was announced by AMP Ltd. In response to the takeover announcement and as required by the Corporations Act, GIO prepared a Part B statement which included a profit forecast for the GIO group

658 [13.582]

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for the year 1998-1999 of $250 million. The profit forecast for the group included a profit forecast for a subsdiary of GIO, GIO Reinsurance, of $80 million. Vines was responsible for the profit forecasts included in the Part B statement which was published on 16 December 1998. GIO Reinsurance had earlier been exposed to significant claims as a result of hurricanes in the Gulf of Mexico. The claims had commenced in September 1998, a month before the hostile takeover was announced and almost three months before the Part B statement was released to the market. It was alleged by ASIC that Vines had contravened the statutory duty of care, skill and diligence under the Corporations Act as a result of publishing an improbable profit forecast. ASIC alleged that Vines had contravened the statutory duty of care, skill and diligence under the Corporations Act on seven occasions: (1) Profit Forecast of 9 November tabled by Vines at a Directors Meeting of GIO; (2) Media Release issued by GIO on 17 November 1998 and the CFO’s report tabled at a board meeting on 17 November 1998; (3) Email dated 22 November 1998 sent by Vines to members of Due Dilligence Committee which allegedly contained the $80 million profit forecast for GIO Reinsurance; (4) Management Sign Off of a Draft Part B statement, which included the $80 million profit forecast and signed by Vines on 8 December 1998; (5) Advice provided by Vines to the Due Diligence Committee on 8 December 1998, confirming profit forecasts; (6) Advice provided to the Auditor confirming profit forecasts and signed by Vines; and (7) Conduct after 8 December 1998 when no correction was made to the profit forecast in the Part B statement, despite AMP announcing an increased bid for GIO. Vines denied the allegations made by ASIC and further argued an honesty defence based on the fact that he had acted honestly throughout and did not stand to gain personally from the alleged contraventions. DECISION: Austin J at trial held Vines had contravened the Corporations Act 11 times and was fined $100,000 and disqualified from acting as a director for three years: ASIC v Vines (2006) 58 ACSR 298. On appeal, the New South Wales Court of Appeal held Vines had contravened the Corporations Act on three occasions, namely, contravention involving: (4) Management Sign Off of a Draft Part B statement, which included the $80 million profit forecast and was signed by Vines on 8 December 1998; (5) Advice provided by Vines to the Due Diligence Committee on 8 December 1998, confirming profit forecasts; and (7) Conduct after 8 December 1998 when no correction was made to the profit forecast in the Part B statement, despite AMP announcing an increased bid for GIO. The New South Wales Court of Appeal was of the opinion that Vines breached the statutory duty of care, skill and diligence on the basis that “it was improbable GIO Reinsurance would achieve the $80 million profit forecast” and Vines “knew or ought to have known” of the improbability of the profit forecast. Vines was, therefore, under a duty to advise the Due Diligence Committee before executing the Management Sign Off that the the GIO Reinsurance profit forecast was improbable: Vines v ASIC (2007) 62 ACSR 1 at [429]-[430] per Spigelman CJ.

[13.584] 659

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Case study Australian Securities and Investments Commission v Hellicar [2012] HCA 17 (High Court of Australia)

[13.586] FACTS: James Hardie Ltd was the holding company of a group companies involved in the manufacture and sale of products containing asbestos. James Hardie was listed on the ASX. Two wholly owned subsidiaries of James Hardie Ltd were sued for personal injury suffered by customers who had come into contact with asbestos products. A new company, James Hardie Industries NV (“JHINV”), would later be incorporated in the Netherlands and that company would become the immediate holding company of James Hardie Ltd and the ultimate holding company of the James Hardie group of companies. On 15 February 2001, the board of James Hardie Ltd met to consider the separation of the two subsidiaries from the parent entity. At a board meeting called by directors of James Hardie Ltd the separation proposal along with the following ASX announcement were considered: ASX Announcement The Chairman tabled an announcement to the ASX whereby the Company explains the effect of the resolutions passed at this meeting and the terms of the Foundation (ASX Announcement). At the February board meeting it was resolved that: (a)

the Company approve the ASX Announcement; and

(b)

the ASX Announcement be executed by the Company and sent to the ASX.

On 16 February 2001, James Hardie Ltd sent to the ASX a media release entitled “James Hardie Resolves its Asbestos Liability Favourably for Claimants and Shareholders” (“the final ASX announcement”). The document referred to the establishment of the Foundation stating: The Foundation [MRCF] has sufficient funds to meet all legitimate compensation claims anticipated from people injured by asbestos products that were manufactured in the past by two former subsidiaries of James Hardie Ltd. However, the Foundation did not have sufficient funds to meet all legitimate compensation claims which were reasonably anticipated in February 2001 from people injured by asbestos products that were manufactured in the past by the two subsidiary companies. ASIC alleged, among other things, that the directors, by approving the draft announcement, had breached their directors’ duties and had contravened s 180(1) of the Corporations Act. ASIC sought declarations of contravention, pecuniary penalties and orders disqualifying the respondents from managing corporations. AT TRIAL: Gzell J, found that the directors of James Hardie Ltd had breached their duties under s 180(1) of the Corporations Act and subsequently made declarations of contravention and other orders in respect of each of the directors. According to Gzell J, the directors had breached their duties with 660 [13.586]

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respect to the ASX announcement on the basis that the directors ought to have known that the announcement was misleading and had voted in favour of the resolution. In relation to the non-executive directors who were in physical attendance at the board meeting (Ms Hellicar and Messrs Willcox, Brown, Terry and O’Brien) Gzell J was of the opinion that all had breached s 180(1) by assenting to the resolution and approving the draft ASX announcement. In relation to the non-executive directors who participated in the meeting by telephone (Messrs Gillfillan and Koffel), Gzell J was of the view that they also had breached s 180(1) by failing either to request a copy or familiarise themselves with the contents of the ASX draft announcement or to abstain from voting in favour of the resolution. According to His Honour, the general counsel and company secretary of James Hardie Ltd (Mr Shafron) did not advise, but should have advised, the board that the ASX draft announcement “was expressed in too emphatic terms concerning the adequacy of Coy and Jsekarb’s funding to meet all legitimate present and future asbestos claims and in that respect it [the announcement] was false or misleading”. Failing to provide advice of this kind was a failure to discharge his duties to James Hardie Ltd with the degree of care and diligence that a reasonable person would exercise if he or she were an officer of a corporation. ON APPEAL TO THE COURT OF APPEAL: The directors of James Hardie Ltd appealed to the Court of Appeal against the declarations of contravention, pecuniary penalty orders and disqualification orders, and against the primary judge’s refusal to excuse the contravention. They submitted that the trial judge had erred and should not have found that the draft ASX announcement which ASIC alleged had been tabled and approved at the February board meeting had been either tabled or approved. The Court of Appeal concluded that ASIC did not establish at trial that the ASX draft announcement was tabled at the February board meeting or that the non-executive directors had approved that draft announcement. The Court of Appeal allowed the appeals by the directors. Finding in their favour the Court of Appeal set aside the declarations and orders made against each of the non-executive directors of James Hardie Ltd and ordered that ASIC’s proceedings against those parties be dismissed. ON APPEAL TO THE HIGH COURT: ASIC appealed the Court of Appeal’s decision, by special leave to the High Court. The High Court allowed the appeal and held that notwithstanding the inaccuracies in the board minutes, the minutes should stand as a contemporaneous and formal record of the actions of the directors at the board meeting. The High Court further held that ASIC’s decision in not calling a key witness which may have assisted the directors of James Hardie Ltd caused no procedural unfairness and there had not been miscarriage of justice warranting a new trial.

[13.586] 661

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Hardie Case Puts Boards on Notice [13.588] Malcolm Maiden, The Age, 4 May 2012 The High Court’s decision on the James Hardie case is not just a huge victory for the Australian Securities and Investments Commission. The court has backed ASIC in a way that re-arms all government regulators in civil court cases. It’s also a lighthouse decision for directors and boards. There’s no new precedents for them. But the confirmation of the NSW Supreme Court’s finding that Hardie directors breached their duties by approving the release of a stock exchange announcement that contained misleading information combines with last year’s Centro decision in the Federal Court to make it crystal clear directors must have a detailed understanding of their companies. There are lessons for the chairmen of boards, too. Boards that comprise a suite of individual experts, which is most of them, have embedded risk: all directors need to be able to be competent in all matters that land on the boardroom table. Board papers need to be accurate and exhaustive, and they must be read, from top to bottom, and understood. Processes for putting information in front of directors must also be improved: the size of the directorial talent pool will be reduced by these changes, but they are essential. The Hardie case has been a marathon, and a little history is needed. Hardie decided in 2001 to legally relocate to the Netherlands, and leave behind a new and separately funded company, the Medical Research and Compensation Foundation, to meet future asbestos-related claims flowing from the days when it made and sold products that contained asbestos. Hardie’s board approved the split on February 15, 2001, and the following day told the stock exchange the new vehicle’s funding of $293 million was sufficient to meet the best estimate of future asbestos liabilities. The statement was not even close: by 2003 estimated liabilities had risen to more than $1.5 billion. ASIC launched its case against former directors and executives of Hardie in 2007, claiming they had breached their duties when they approved the draft of the stock exchange statement. Minutes of the board’s February meeting were tendered by ASIC. They had been approved by the board at its next meeting in April 2001, and recorded that a draft of the stock exchange announcement had been tabled and approved. A potential witness, David Robb, the lawyer who had supervised the preparation of the board minutes, was not called by ASIC, but the court rejected arguments the board had not reviewed and approved the draft statement, and found the directors had breached their duties by approving it. That decision was then overturned in the NSW Court of Appeal. It found ASIC owed a special duty of fairness when it ran court cases, and had breached it, fatally undermining its case, when it did not call Mr Robb. The High Court yesterday allowed ASIC’s appeal of the Court of Appeal’s decision. There was no 662 [13.588]

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basis for inferring Mr Robb might have given evidence favourable to the directors, it found, and no unfairness had been caused by ASIC’s decision not to call him. That’s a crucial finding for ASIC and other regulators who run civil cases, including the Australian Competition and Consumer Commission. Government agencies all have a “model litigant” duty to run fair legal actions. The High Court has, however, restored the status quo for that duty, and rejected the Appeals Court’s finding the duty extends to the calling of all material witnesses in cases government agencies run. It has, in effect, removed a handicap on ASIC as a litigant, and done so in a way that flows right through the system. All government agencies must be model litigants. But they can once again shape their witness lists without running the risk their cases will be torpedoed on appeal. For directors and non-executive directors in particular, the High Court case makes several things even clearer than they were after the Centro decision in June last year. In Centro, Federal Court judge John Middleton found directors had breached their duties in 2007 by signing off on accounts that failed to recognise Centro needed to repay billions of dollars of debt within a year - a task that defeated it after the global crisis erupted. The directors had not “understood and applied their minds” to the accounts, he said, adding that a board sat at the apex of a company and had the greatest responsibility to do so. The NSW Supreme Court decision on James Hardie that the High Court has resurrected goes further, by making clear directors need to not only be able to dissect company accounts, but be able to dissect and understand any complex corporate manoeuvre. In the case of Hardie, that required a detailed understanding of the actuarial assumptions behind reports the building group had commissioned into its asbestos liabilities, for example. The decisions impose very high standards on all directors. They need to have a range of skills, not just a specialty, and they must satisfy themselves their companies have processes in place to bring information before directors enabling them to sign off on a proposal with confidence. ASIC’s chairman, Greg Medcraft, correctly noted yesterday these requirements had always existed. Hardie makes them more explicit, however and it’s now cast in stone.

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Expected standard of conduct Care [13.590] A director is bound to take reasonable care in the performance of her or his office: Daniels v Anderson (1995) 37 NSWLR 438 at 500; ASIC v Adler (2002) 168 FLR 253 at [372]. The requirement of “reasonable care” suggests that there is an objective standard of care which all directors are expected to meet regardless of the experience of the director or the size of the company involved. However, the standard should not be viewed as a wholly objective one. It may vary from case to case depending on: • the size and the business of the particular company; and • the experience, knowledge and/or skills that the director has or held out herself or himself as having at the time of appointment. These factors can affect the standard of care expected by both the director’s general law and statutory duties of care: Daniels v Anderson (1995) 37 NSWLR 438 at 500; ASIC v Adler (2002) 168 FLR 253 at [372]. The words used in the statutory duty (s 180(1)) to indicate this are “reasonable person”, “director or officer of a corporation in the corporation’s circumstances” and “occupied the office held by, and had the same responsibilities within the corporation”. The judgment of Austin J in ASIC v Rich (2003) 174 FLR 128 gives some guidance as to how these words are to be interpreted. In this case, the director in question (the non-executive chair of One.Tel) was a chartered accountant with considerable business experience. Austin J held (at [50]) that his “qualifications, experience and expertise, and his occupation of the position of ‘foundation’ director, chairman and chairman of the finance and audit committee, are all matters that make up or contribute to [his] responsibilities within the corporation”. Austin J re-examined the requisite standard of care required under the statutory duty in ASIC v Vines (2006) 58 ACSR 298 where his Honour stated at [1,094]: my view is that to hold that the legislature has lowered the statutory standard of care and diligence below the civil standard by rendering the statutory provision a civil penalty provisions would be inconsistent with the legislative history of [the statutory duty] and also with the present case law.

Austin J went on further to conclude at [1,096]: The case law since that time has proceeded on the basis that developments with respect to the general law standard of care and diligence of company directors and officers are relevant and highly persuasive, if not directly applicable, to the interpretation of the statutory standard. Daniels v Anderson (1995) 37 NSWLR 438, a case about the general law standard of care of company directors, has been applied at first instance in the statutory context. I referred to the principal authorities in ASIC v Vines (2003) 48 ACSR 322. Sitting at first instance, I would not be justified in holding that the location of the [statutory duty] in the civil penalty regime had the effect of setting the standard of care at a lower and less demanding level than the general law. 664 [13.590]

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In Parker v Tucker; Re Purcom No 34 Pty Ltd (In Liq) [2010] FCA 263 the court found that, in line with Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187; Daniels v Anderson (1995) 37 NSWLR 438, a duty of care and skill at common law and in equity is owed, and that a similar duty of care and diligence was owned under s 180, Sheahan v Verco (2001) 79 SASR; Daniels v Anderson (1995) 37 NSWLR 438; Australian Innovation Ltd v Petrovsky (1996) 21 FCR 218. The acts of the director in question should be assessed against “what an ordinary person, with the knowledge and experience of the defendant might be expected to have done in the circumstances if he or she was acting on their own behalf” Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187; Australian Securities Commission v Gallagher (1993) 11 WA R 105. The standard of reasonable care is that of an “ordinary prudent person” as noted in The Equitable Fire Insurance Co [1925] 1 Ch 407. It was held that when assessing the standard under the Corporations Act, the Court must consider the “company circumstances and the director’s position and responsibilities within the company”. In Purcom, the court found that where there was the potential for conflict of interest and duty, that “special vigilance” should have been applied. Recently, the High Court re-evaluated the standard for the duty of care in the case of Shafron v Australian Securities and Investments Commission [2012] HCA 18. The High Court makes some interesting observations concerning the application of the statutory duty to company officers including company secretaries. According to the High Court, the statutory duty contained under s 180(1) covers “responsibilities [that are] … not confined to statutory responsibilities; they include whatever responsibilities the officer concerned had within the corporation, regardless of how or why those responsibilities came to be imposed on that officer.” The case is discussed below. Case study Shafron v Australian Securities and Investments Commission [2012] HCA 18 (High Court of Australia)

[13.595] In August 1998, Mr Shafron was employed as “general counsel and company secretary” of James Hardie Industries Ltd (“JHIL”). He was appointed company secretary on 13 November 1998. Just over a year later, on 17 November 1999. The Court of Appeal found that Mr Shafron had contravened s 180(1) of the Corporations Act in two respects that are put in issue in this appeal. Both contraventions were contraventions by omission: failing to give certain advice, in the one case, to the chief executive officer (Mr Macdonald) or the board of JHIL and, in the other, to the board of James Hardie Ltd. Mr Shafron presented his appeal as raising three questions: (a)

In what respect or respects did the statutory definition of “officer” apply to him?

(b)

Having regard to the answer given to the first question: [13.595] 665

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(i)

Did he fail to exercise the relevant standard of care by failing to advise either the chief executive officer or the board that the relevant information should be disclosed to the ASX?

(ii)

Did he fail to exercise the relevant standard of care by failing to advise the board that the relevant material did not take account of superimposed inflation but should have?

HELD: According to the High Court, the degree of care and diligence that is required by s 180(1) is fixed as an objective standard which is identified by reference to two relevant elements, namely the element identified in para (a): “the corporation’s circumstances”, and the element identified in para (b): the office and the responsibilities within the corporation that the officer in question occupied and had. No doubt, those responsibilities include any responsibility that is imposed on the officer by the applicable corporations legislation. But the responsibilities referred to in s 180(1) are not confined to statutory responsibilities; they include whatever responsibilities the officer concerned had within the corporation, regardless of how or why those responsibilities came to be imposed on that officer.

Standard of care: Breach of directors' duty vs contravention of civil penalty [13.600] The New South Wales Court of Appeal in ASIC v Vines (2007) 62 ACSR 1 drew a distinction between the requisite standard of care for breach of a directors’ duty and a finding of contravention of a civil penalty provision. According to the New South Wales Court of Appeal, a court should take into account the severity of the consequences which flow from a finding of a “contravention” of a statutory provision, relative to the finding of a “breach” of a civil duty. A finding of contravention for a civil penalty provision under the Corporations Act may be more harmful to a director’s reputation, relative to proof of breach of a directors’ duty (at [143]-[144] per Spigelman CJ): the consequences that may flow from a finding of contravention of a civil penalty provision are of a different order of severity to the consequences that may flow from a successful action for breach of the civil duty of care by company directors or officers. Although such a contravention does not invoke, directly, the particular stigma of a finding of criminal conduct, nevertheless the consequences to an individual by way of penalty and or disqualification may be as severe as any likely criminal sentence, save for a term of imprisonment. The law of statutory interpretation requires this Court to have regard to these consequences

Skill [13.610] Directors are expected to possess certain basic skills in relation to the financial statements and financial affairs of their companies. In Commonwealth Bank v Friedrich (1991) 9 ACLC 946 at 956, Tadgell J commented: 666 [13.600]

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In particular, the stage has been reached where a director is expected to be capable of understanding his company’s affairs to the extent of actually reaching a reasonably informed opinion of its financial capacity … I think it follows that he is required by law to be capable of keeping abreast of the company’s affairs, and sufficiently abreast of them to act appropriately if there are reasonable grounds to expect that the company will not be able to pay all its debts in due course and he has reasonable cause to expect it.

There is now no doubt that this is the position and all directors must comply with a “core, irreducible requirement of skill” involving “an objective test, such as ‘ordinary competence’ or ‘reasonable ability’”: DC of T v Clark (2003) 57 NSWLR 113 at [109] per Spigelman CJ; see ASIC v Vines (2003) 48 ACSR 282 at [36] per Austin J). The other skills expected of a director will depend on the circumstances of the director’s appointment. A director need not bring any special qualifications to the job. For example, a director of a life insurance company need not be a doctor or an actuary. However, where a director does have such special skills, he or she will be expected to use them in relation to the affairs of the company: see ASIC v Rich (2003) 174 FLR 128. The director will be expected to exercise the degree of skill that may reasonably be expected of any director possessing the same level of knowledge, expertise or experience: Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 Case study Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 (Civil Division of the Court of Appeal of England and Wales)

[13.612] FACTS: On a wind up application by the company’s liquidator, City Equitable Fire Insurance Ltd was wound up. In agreeing to wind up the company, the court found that City Equitable had lost over £1.2 million, which was largely caused by the deliberate fraud of the managing director. In an earlier proceeding, the managing director had been found guilty of defrauding the company and was sentenced to jail. The liquidator of the company decided to commence legal action against all of the other directors of City Equitable for negligence and breach of fiduciary duty in respect of the losses suffered by the company. DECISION: The Court held that the directors of the company, other than the managing director, had not breached their fiduciary duties. The losses suffered by the company were the direct outcome of the deliberate and systemic defrauding of the company’s accounts occasioned by the managing director. The other directors were not aware of the managing director’s actions, nor were the other directors reckless in their duty.

Recently, the Federal Court case Australian Securities and Investments Commission v Healey [2011] FCA 717 re-examined the requirements of the duty of care, skill and diligence for directors when reviewing the financial statements of the company they serve.

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Case study Australian Securities and Investments Commission v Healey [2011] FCA 717 (Federal Court of Australia)

[13.614] FACTS: The Australian Securities and Investments Commission made an application under ss 1317E, 1317G and 206C of the Corporations Act for declarations of contravention against the directors of Centro Properties Limited (CPL), Centro Property Trust (CPT) and Centro Retail Trust (CRT) in relation to ss 180(1), 601FD(3) and 344(1) of the Act and for orders that each of the defendant directors pay pecuniary penalties and be disqualified from managing corporations. The 2007 annual reports of Centro Properties Group (CNP) and Centro Retail Group (CER) failed to disclose significant matters. In the case of CNP, the report failed to disclose some $1.5 billion of short-term liabilities by classifying them as non-current liabilities, and failed to disclose guarantees of short-term liabilities of an associated company of about US$1.75 billion that had been given after the balance date. In the case of CER, the 2007 annual reports failed to disclose some $500 million of short-term liabilities that had been classified as non-current. The conduct relied on by ASIC in support of the orders requested by ASIC involved a number of allegations in relating to the approval of the consolidated financial statements of CPL, CPT and CRT for the financial year ending on 30 June 2007 at a board meeting attended by the defendant directors on 6 September 2007. DECISION: According to Middleton J: Notwithstanding that the directors were “intelligent, experienced and conscientious people … [and had acted honestly as directors] the directors failed to take all reasonable steps required of them, and acted in the performance of their duties as directors without exercising the degree of care and diligence the law requires of them.” In delivering her judgment in the case, Middleton J made a number of important observations concerning the requisite standard of care, skill and diligence required by directors generally: (1)

The Nature of the Proceedings [The proceedings were] “not about a mere technical oversight. The information not disclosed was a matter of significance to the assessment of the risks facing CNP and CER. Giving that information to shareholders and, for a listed company, the market, is one of the fundamental purposes of the requirements of the Act that financial statements and reports must be prepared and published. The importance of the financial statements is one of the fundamental reasons why the directors are required to approve them and resolve that they give a true and fair view.”

(2)

Certification of the financial reports by the directors as providing a “true and fair view” “In the light of the significance of the matters that they knew, they could not have, nor should they have, certified the truth and fairness of the financial statements, and published the annual reports in the

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absence of the disclosure of those significant matters. If they had understood and applied their minds to the financial statements and recognised the importance of their task, each director would have questioned each of the matters not disclosed. Each director, in reviewing financial statements, needed to enquire further into the matters revealed by those statements.” (3)

The requirement for careful & diligent review of the financial statements “The central question in the proceeding has been whether directors of substantial publicly listed entities are required to apply their own minds to, and carry out a careful review of, the proposed financial statements and the proposed directors’ report, to determine that the information they contain is consistent with the director’s knowledge of the company’s affairs, and that they do not omit material matters known to them or material matters that should be known to them …” “No less is required by the objective duty of skill, competence and diligence in the understanding of the financial statements that are to be disclosed to the public as adopted and approved by the directors.” “No one suggests that a director should not personally read and consider the financial statements before that director approves or adopts such financial statements. A reading of the financial statements by the directors is not merely undertaken for the purposes of correcting typographical or grammatical errors or even immaterial errors of arithmetic. The reading of financial statements by a director is for a higher and more important purpose: to ensure, as far as possible and reasonable, that the information included therein is accurate. The scrutiny by the directors of the financial statements involves understanding their content. The director should then bring the information known or available to him or her in the normal discharge of the director’s responsibilities to the task of focussing upon the financial statements. These are the minimal steps a person in the position of any director would and should take before participating in the approval or adoption of the financial statements and their own directors’ reports.”

(4)

What it means to be a director “A director is an essential component of corporate governance. Each director is placed at the apex of the structure of direction and management of a company. The higher the office that is held by a person, the greater the responsibility that falls upon him or her. The role of a director is significant as their actions may have a profound effect on the community, and not just shareholders, employees and creditors. This proceeding involves taking responsibility for documents effectively signed-off by, approved, or adopted by the directors. What is required is that such documents, before they are adopted by the directors, be read, understood and focussed upon by each director [13.614] 669

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with the knowledge each director has or should have by virtue of his or her position as a director. I do not consider this requirement overburdens a director, or as argued before me, would cause the boardrooms of Australia to empty overnight. Directors are generally well remunerated and hold positions of prestige, and the office of director will continue to attract competent, diligence [sic] and intelligent people.” (5)

Guidance, Monitoring & Understanding of the Financial Affairs of the Company “The case law indicates that there is a core, irreducible requirement of directors to be involved in the management of the company and to take all reasonable steps to be in a position to guide and monitor. There is a responsibility to read, understand and focus upon the contents of those reports which the law imposes a responsibility upon each director to approve or adopt.” “All directors must carefully read and understand financial statements before they form the opinions which are to be expressed in the declaration required by s 295(4). Such a reading and understanding would require the director to consider whether the financial statements were consistent with his or her own knowledge of the company’s financial position. This accumulated knowledge arises from a number of responsibilities a director has in carrying out the role and function of a director. These include the following: a director should acquire at least a rudimentary understanding of the business of the corporation and become familiar with the fundamentals of the business in which the corporation is engaged; a director should keep informed about the activities of the corporation; whilst not required to have a detailed awareness of day-to-day activities, a director should monitor the corporate affairs and policies; a director should maintain familiarity with the financial status of the corporation by a regular review and understanding of financial statements; a director, whilst not an auditor, should still have a questioning mind.”

(6)

An essential component of Corporate Governance “A board should be established which enjoys the varied wisdom, experience and expertise of persons drawn from different commercial backgrounds. Even so, a director, whatever his or her background, has a duty greater than that of simply representing a particular field of experience or expertise. A director is not relieved of the duty to pay attention to the company’s affairs which might reasonably be expected to attract inquiry, even outside the area of the director’s expertise. The words of Pollock J in the case of Francis v United Jersey Bank (1981) 432 A 2d 814, quoted with approval by Clarke and Sheller JJA in Daniels v Anderson (1995) 37 NSWLR 438, make it clear that more than a mere

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‘going through the paces’ is required for directors. As Pollock J noted, a director is not an ornament, but an essential component of corporate governance.” (7)

Ability to Delegate “Nothing I decide in this case should indicate that directors are required to have infinite knowledge or ability. Directors are entitled to delegate to others the preparation of books and accounts and the carrying on of the day-to-day affairs of the company. What each director is expected to do is to take a diligent and intelligent interest in the information available to him or her, to understand that information, and apply an enquiring mind to the responsibilities placed upon him or her. Such a responsibility arises in this proceeding in adopting and approving the financial statements. Because of their nature and importance, the directors must understand and focus upon the content of financial statements, and if necessary, make further enquiries if matters revealed in these financial statements call for such enquiries.”

(8)

Financial Literacy Requirement “The omissions in the financial statements the subject of this proceeding were matters that could have been seen as apparent without difficulty upon a focussing by each director, and upon a careful and diligent consideration of the financial statements. As I have said, the directors were intelligent and experienced men in the corporate world. Despite the efforts of the legal representatives for the directors in contending otherwise, the basic concepts and financial literacy required by the directors to be in a position to properly question the apparent errors in the financial statements were not complicated.”

Recently, the ASIC released a media release regarding the Federal Court of Australia’s decision with Centro Properties Group and Centro Retail Group. The Federal Court’s decision in Centro provides important guidance to directors regarding the level of their communication to investors, especially when it involves key elements of the financial position of the company. The media release is reproduced below. Centro Civil Penalty Proceedings [13.616] ASIC Media Release 11-188MR, 31 August 2011 The Federal Court today handed down its penalty decision against the 7 directors and former Chief Financial Officer of Centro Properties Group (CNP) and Centro Retail Group (CER). On 27 June 2011 the Court found that the 7 directors had breached their duties when they signed off on financial reports that failed to disclose [13.616] 671

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significant matters. The former CFO had, at the outset of the trial, admitted he contravened the Corporations Act as alleged by ASIC. In the case of CNP, the report failed to disclose some $1.5 billion of short-term liabilities by classifying them as non-current liabilities, and failed to disclose guarantees of short-term liabilities of an associated company of about US$1.75 billion that had been given after the balance date. In the case of CER, the 2007 annual reports failed to disclose some $600 million of short-term liabilities that had been classified as non-current. In today’s judgment the Court refused the directors’ applications to be exonerated from their contraventions and made declarations that all directors and the CFO contravened the law. In addition the Court fined Mr Andrew Scott (the former Chief Executive Officer) $30,000, and disqualified Mr Nenna, the former CFO, from managing corporations for 2 years. The Court ordered the defendants to pay ASIC’s costs of the action. Middleton J observed in the course of extensive reasons for his decision that: … very much at the forefront of my consideration has been the issue of general deterrence … What the Court has attempted to do is to recognise the seriousness of the contraventions, but at the same time take into account the circumstances in which the contraventions occurred, the overall conduct of the defendants, and the impact of the penalties imposed on these particular defendants … ASIC believes the Centro decision provides important guidance and direction on corporate accountability of directors and management. The Court’s reasons for the penalty decision include the significant effect on and debate in the director community about the earlier liability judgment. The Court said it is important to appreciate that the liability judgment has attracted widespread publicity. The acts and omissions of the directors, as recorded in the liability judgment, have already been the subject of widespread public dissemination. The Court noted that the widespread public analysis and associated embarrassment and reputational damage for each of the directors meant that the need for the imposition of a disqualification order or pecuniary penalty for reasons of general deterrence is much less than it would otherwise be. Middleton J canvassed all the circumstances facing the directors and observed: … the appropriate course, which in my view will have a substantial impact on the non-executive directors, is to refuse the applications for relief from liability, and to make the declarations as sought by ASIC. I think this is sufficient to “send the message” to the community that the Court strongly disapproves of the conduct giving rise to the contraventions, but at the same time is appreciative of the circumstances of the non-executive directors, the circumstances leading to the contraventions, and subsequent events. ASIC Chairman Greg Medcraft said ASIC acted as it believed that the directors’ and officer’s behaviour did not meet the expectations of the law. 672 [13.616]

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“Directors in particular play an important gatekeeper role for our markets and they must not uncritically adopt the work of management on major issues for which they are responsible,” Mr Medcraft said. “The key elements of the financial position of the company are things directors should understand and be able to communicate accurately to the market.” In this context, Middleton J said: The information not disclosed was a matter of significance to the assessment of the risks facing CNP and CER. Giving that information to shareholders and the market is one of the fundamental purposes of the requirements of the Act that financial statements and reports must be prepared and published. The importance of the financial statements is one of the fundamental reasons why the directors are required to approve them and resolve that they give a true and fair view. Mr Medcraft added that ASIC was committed to taking on the big and difficult cases where appropriate. “We have a consistent approach to enforcing the law and, when we think it’s in the public interest, we will do so. The public would expect nothing less,” Mr Medcraft said. Background On 19 October 2009, ASIC commenced these proceedings against current and former officers of Centro (refer 09-202AD). On 27 June 2011, Justice Middleton handed down his liability decision (refer 11-125MR). © Australian Securities & Investments Commission. Reproduced with permission.

ASIC Wins Case against Centro Directors [13.618] Leonie Wood, The Age, 27 June 2011 Update A Federal Court judge has strongly warned the corporate regulator to “consider carefully” what it does with a decision handed down this morning that found directors of the Centro property group breached their duties when they failed to notice multi-billion dollar errors in the property group’s accounts. Justice John Middleton said that in the reasons for his decision, which runs to 186 pages, he found the directors were “intelligent, experienced and conscientious” and that they relied on extensive advice and processes before approving erroneous financial statements in 2007. He also said that “there is no suggestion that the directors were dishonest”. The Australian Securities and Investments Commission will make submissions about penalties on August 1. The corporate regulator could ask the court to ban the directors from managing or serving as directors, financial penalties, or ask for simple declarations.

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Outside the court, a spokesman for the six non-executive directors said they were “disappointed” with the decision and would review the detail of the reasons. Former chief executive, Andrew Scott, declined to comment. Centro’s former chief financial officer, Romano Nenna, was not in court. He has already made certain admissions about ASIC’s allegations. Duties breached Justice Middleton this morning found the directors breached their duties when they approved financial statements for 2006-07 which did not disclose that Centro was required to repay billions of dollars of debt within a matter of months. The judge read 23 paragraphs of his decision in court today. He said the case was “not about a mere technical oversight” but that it went to the heart of whether directors of substantial publicly listed companies must “apply their minds” to their review of financial statements and the directors’ report in order to determine in the information is consistent with what they know and that it does not omit material matters. “The significant matters not disclosed [the short-term debt and post-balance date guarantees entered into by Centro] were well known to the directors, or if not well known to them, were matters that should have been well known to them,” the judge said. He said considering the significance of the matters that they knew “they could not have, nor should they have, certified the truth and fairness of the financial statements …” “If they had understood and applied their minds to the financial statements and recognised the importance of their task, each director would have questioned each of the matters not disclosed,” Justice Middleton said in his decisions. “Each director, in reviewing financial statements, needed to enquire further into the matters revealed by those statements.” He said what was required of directors was they read, understand and focus on the documents they approve “with the knowledge each director has or should have by virtue of his or her position as a director”. “I do not consider this requirement overburdens a director, or as argued before me, was cause the boardrooms of Australia to empty overnight.” “Directors are generally well remunerated and hold positions of prestige, and the office of director will continue to attract competent, diligence [sic] and intelligent people.” ASIC will hold a press conference in Sydney responding to the decision. Centro Property Group shares, meanwhile, lost 0.3 of a cent, or 7.5 per cent, to 3.7 cents in recent trading, valuing the company at just $36 million. Centro Property shares peaked at just over $10 each in May 2007.

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Possible bans Eight of Centro’s current and former directors face possible bans and financial penalties following Justice Middleton’s findings. ASIC had claimed that the Centro directors fell short of the minimum standard of care expected from boardroom participants. Centro directors, however, argued that while a mistake was made on their watch, they were entitled to rely on the specialist knowledge and advice provided by Centro’s accounting managers and by its auditors, PricewaterhouseCoopers. They had claimed the regulator is trying to impose an impossibly high standard of perfection, one that would require every director to acquire a finely tuned knowledge of accounting standards and to understand how changes to those standards might affect figures in company accounts. Centro directors in late 2007 approved financial statements that indicated the company had no short-term debt, when in fact it needed to repay billions of dollars of debt within 12 months, including a $1.1 billion J.P. Morgan facility by December. $1.1 billion misinterpretation The $1.1 billion error apparently arose because an accounting standard for short-term debt had been wrongly interpreted. The error was detected after the publication of unaudited preliminary accounts in August, but the court heard it was not brought to the attention of directors before they approved the final version of the accounts in September. ASIC was suing Centro’s former chief executive, Andrew Scott; its former chairman, Brian Healey; current chairman, Paul Cooper; the former head of the audit committee, Sam Kavourakis; current non-executive director, Jim Hall; and former non-executive directors, Peter Wilkinson and Graham Goldie. Centro’s former finance director, Romano Nenna, has already admitted some of ASIC’s allegations. During a trial in April and May, the directors claimed they did all that could reasonably be expected. The court heard some of the directors did not read the final version of the financial statements or that they did not examine them in detail. It also heard that Centro’s final statements went through numerous changes. In final submissions during May, counsel for ASIC, Mark Derham, QC, told the court the regulator expected a level of “financial literacy” of directors, but not a working knowledge of accounting standards. The 2006-07 accounts also did not disclose that Centro, after June 30, had guaranteed about $1.75 billion of US dollar liabilities for an associated US company. When the share market in late 2007 learnt Centro was having difficulties refinancing its bank debt, the company’s share price plunged. It was not until early 2008 that Centro revealed it had understated its short-term liabilities by about $3 billion. [13.618] 675

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Justice Middleton will later preside over a directions hearing for two class actions in which investors are suing Centro for losses incurred as a result of the failure to properly disclose the debts. The class actions are not due for trial until March 2012.

Diligence [13.620] The element of “diligence” requires directors to take reasonable steps to place themselves in a position to monitor and guide the management of the company: Daniels v Anderson (1995) 37 NSWLR 438 at 501. Diligence by a director includes: • attendance at all board meetings unless exceptional circumstances, such as illness, prevent attendance; • a basic understanding of the business of the company; • a continuing obligation to keep informed about and monitor the financial and general affairs of the company (ASIC v Adler (2002) 168 FLR 253 at [372(8)]; ASIC v Rich (2003) 174 FLR 128; and ASIC v Vines (2007) 62 ACSR 1); and • a continuing obligation to monitor any changes in the company’s fortunes or conditions including any profit forecasts that may be adversely affected: ASIC v Vines (2007) 62 ACSR 1. In a recent High Court decision in Forrest v ASIC; Fortescue Metals Group Ltd v ASIC [2012] HCA 39, the issue of whether a listed company and one of its directors had breached the continuous disclosure provisions and directors’ duties under the Corporations Act was examined in the context of public statements made by Fortescue to the Australian Securities Exchange. Case study Forrest v ASIC; Fortescue Metals Group Ltd v ASIC [2012] HCA 39

[13.622] FACTS: ASIC alleged that both Fortescue Ltd, a listed Australian company and Mr Forrest, the then CEO and Chairman of Fortescue Ltd contravened the Corporations Act during 2004 and 2005 when Fortescue gave information to the ASX about a proposed mining project in Western Australia called the Pilbara Iron Ore and Infrastructure Project. The project was to consist of a mine in the Pilbara region of Western Australia, a port at Port Hedland and a railway to connect the mine to the port. ASIC alleged that since the agreements were not enforceable under Australian law Fortescue had engaged in misleading or deceptive conduct by making announcements and publishing notices that were misleading or deceptive or likely to mislead or deceive. ASIC alleged that Fortescue contravened the continuous disclosure requirements of s 674. ASIC further alleged that Mr

676 [13.620]

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Forrest had contravened on each occasion s 180(1) for failing to exercise the requisite degree of care and diligence as required by s 180(1). ASIC based its actions on allegations that Fortescue made announcements that Fortescue had entered into binding agreements with China Railway Engineering Corporation (CREC), China Harbour Engineering Company (Group) (CHEC) and China Metallurgical Construction (Group) Corporation (CMCC). The Chinese entities were described as “three of the largest state owned companies in China”. The CREC agreement was signed on 6 August 2004, the CHEC agreement was signed on 1 October 2004 and the CMCC agreement was signed on 20 October 2004. Each agreement was headed “Framework Agreement”. Federal Court of Australia: At first instance in the Federal Court of Australia, Gilmour J dismissed ASIC’s claims. (See ASIC v Fortescue Metals Group Ltd (No 5) (2009) 264 ALR 201). Full Court of Federal Court of Australia: ASIC then appealed to the Full Court of the Federal Court (Keane CJ, Emmett and Finkelstein JJ). The Full Court allowed the appeal and declarations of contravention of the Corporations Act were made. (See ASIC v Fortescue Metals Group Ltd (2011) 190 FCR 364). High Court of Australia: By special leave, Fortescue and Mr Forrest appealed to the High Court seeking the reinstatement of the orders made at first instance by the Federal Court of Australia. The High Court allowed the appeal and the consequential orders sought by Fortescue Ltd and Mr Forrest. According to the High Court the alleged statements were not misleading or deceptive or likely to mislead or deceive. Since the statements were not misleading or deceptive or likely to mislead or deceive, ASIC failed to demonstrate that Fortescue Ltd contravened the continuous disclosure requirements of s 674. Since there was no breach by Fortescue Ltd of either s 674 or s 1041H, the High Court was of the opinion that Mr Forrest had not failed to exercise his powers or discharge his duties as a director with the degree of care and diligence required by s 180(1).

[13.622] 677

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Figure 13.4: Summary of duty of care and skill

Issues affecting the duty of care [13.630] Four currently contentious issues which impact on the way in which directors discharge their duty of care are: • differences in the functions of company boards; • differing responsibilities of executive and non-executive directors; • delegation of functions and reliance by directors on the performance of these functions by other people within the company; and • differences between entrepreneurial risk taking and failing to act with care.

Differing board functions [13.640] The duty of care requires an understanding of the functions of a board of directors. Those functions may vary greatly depending on whether the company is a small family company, not-for-profit company or a large public company. Even within the public company context, there is debate about the functions of company boards. In AWA Ltd v Daniels (1992) 10 ACLC 933 at 678 [13.630]

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1,013-5, Rogers CJ acknowledged that in large public companies, it is no longer possible for the board to make decisions about major policy issues and also manage the day-to-day activities of the company. The functions are divided up. The board sets the company’s policies. The executive directors and senior management take responsibility for the day-to-day management of the company’s business in accordance with board policies. However, on appeal, the majority judges (Clarke and Sheller JJA) downplayed the division of functions between the board and the management of a public company. They acknowledged that the size and business of a company can influence the functions discharged by its directors. However, they reasoned that the board of directors had to be viewed as the “apex of the structure of direction and management”. The duties of the directors still included acting collectively to manage the company: Daniels v Anderson (1995) 37 NSWLR 438 at 505. In its “Corporate Duties Below Board Level Report” (April 2006), CAMAC sought to redefine managerial functions by adopting a “functional” approach in defining a person’s role in a corporation. CAMAC’s attempt to define an individual by the function he or she performs rather than rely on the person’s formal status within the company is designed to broaden the possible application of the Corporations Act and, in particular, directors’ duties. CAMAC (at [3.2.1], quoting the HIH Royal Commission report) justifies its approach on the basis of the findings of the HIH Royal Commission: All the general duties imposed by Chapter 2D of the Corporations Act should be imposed on directors, secretaries and the wider class of personnel encompassed within the functional definition [defined by reference to a person’s role in a corporation, rather than by that person’s formal status … Both before and after the CLERP amendments it was accepted that there is a class of personnel upon whom the general duties of directors should also be imposed. In my opinion that class should not distinguish between employees and non-employees. Instead, it should be functionally defined. That is because it is increasingly common for a wide range of corporate functions to be performed by consultants or other contractors who are not strictly “employees”.

Interestingly, trial judge (Gzell J) in the recent decision of ASIC v Macdonald (No 11) (2009) 230 FLR 1 was of the view that non-executive directors could be made liable for breach of their directors’ duties and in particular, s 180(1) by approving a misleading announcement even if the directors were not in physical attendance at the relevant board meeting.

Executive vs non-executive directors Outline [13.650] Executive directors are full-time employees, involved in the day-today management of the company. Non-executive directors have a part-time and intermittent involvement with the company. Can the same standard of [13.650] 679

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care be expected of both executive and non-executive directors? There are competing points of view on this issue. Each is supported by case law.

First viewpoint [13.660] The first viewpoint is that there is a difference between the standard of care expected of executive and non-executive directors. A higher standard of care can be expected of executive directors in a public company: see AWA Ltd v Daniels (1992) 10 ACLC 933 at 1,013-5 (Rogers CJ (Comm D)); Claremont Petroleum NL v Cummings (1992) 10 ACLC 1,685; ASC v Gallagher (1993) 11 WAR 105; Hurley v NCSC (1993) 11 ACLC 443; Vrisakis v ASC (1993) 9 WAR 395; 11 ACSR 162; Dempster v Mallina Holdings Ltd (1994) 13 WAR 124; Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187; ASIC v Adler (2002) 168 FLR 253 at [372]; and ASIC v Hellicar [2012] HCA 17.

Opposing view [13.670] The second viewpoint is that there is no significant difference in the standard of care expected of executive and non-executive directors. In Daniels v Anderson (1995) 37 NSWLR 438, the majority judges required a more rigorous standard of care to be adopted by all directors, whether executive or non-executive: see also Re Property Force Consultants Pty Ltd [1997] 1 Qd R 300; South Australia v Clark (1996) 66 SASR 199; 14 ACLC 1,019; Gamble & Mann v Hoffman (1997) 15 ACLC 1314; ASC v Donovan (1998) 28 ACSR 583; Circle Petroleum (Qld) Pty Ltd v Greenslade (1998) 16 ACLC 1577; Sheahan v Verco (2001) 79 SASR 109; and Gold Ribbon (Accountants) P/L v Sheers (2005) 23 ACLC 1,288. In Gold Ribbon (Accountants) P/L v Sheers a non-executive director was alleged to have breached his director’s duty and fiduciary duty for failing to ensure that accepted lending standards were in place and exercised by Gold Ribbon, a company involved in providing unsecured loans to practising accountants. It was alleged by Gold Ribbon that the director’s breach of duty caused the company to make five inappropriate loans which led to the borrowers defaulting and the company suffering financial losses. Proceedings were commenced with the aim of recovering from the directors the losses suffered by the company under the defaulting loans. At first instance, Muir J held (at [93]-[94]) that a non-executive director would be liable for breach of duty and could not delegate his responsibilities to others without appropriate checks on their competency: But the fact that some directors were in executive or managerial roles could not relieve the others of their continuous duties discussed earlier. Mr Dunn in particular, without properly assuring himself that the scheme had been properly structured, could not relieve himself of liability by leaving matters in the hands of the other directors or in the hands of Austide, the expertise of which had not been considered, let alone investigated, by him. Any delegation by a director of one of his functions as a director would not fulfil his duty if he did not believe on 680 [13.660]

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reasonable grounds that the persons to whom the duty was delegated had appropriate expertise and competence and were appropriate repositories of his trust

Importantly, Muir J in Gold Ribbon (at [90]-[91]) was of the view that all directors, whether they are executive or non-executive have a duty to use their skills and experience for the benefit of the company: A company is entitled to have all its directors attend to its affairs and to fulfil their respective duties as directors. General business experience and “knockabout commonsense” cannot, of themselves, in circumstances such as those under consideration, equip a director, in the absence of detailed advice based on a full appreciation of the facts, to understand fully the risks inherent in financing and the procedures and mechanisms best suited to overcoming them. As the only member of the board with appreciable experience in commercial lending, Mr Dunn had a duty to give the company the benefit of that experience and the expertise which accompanied it

On the issue of reviewing and familiarising oneself with company documentation Muir J in Gold Ribbon was equally forceful (at [97]): It was therefore incumbent on Mr Dunn to familiarise himself with this documentation, consider its adequacy and seek expert legal or other advice where appropriate. Mr Dunn did not act in this way. He did not obtain copies of these documents to peruse. Nor did he ensure that they had been settled or approved by lawyers with appropriate commercial expertise

On Appeal to the Queensland Court of Appeal Muir J’s decision that the non-executive director’s breach of duty had caused the losses suffered by Gold Ribbon was overturned: Gold Ribbon (Accountants) Pty Ltd (in liq) v Sheers [2006] QCA 335. The Court of Appeal was of the opinion that the non-executive’s breaches of duty did not cause the loss suffered by Gold Ribbon. Instead, “but for the absence of the loan assessment procedures involved in what his Honour found to be ‘acceptable lending practice’, the improvident loans would not have been made”: Gold Ribbon (Accountants) Pty Ltd (in liq) v Sheers [2006] QCA 335 at [323] per Keane J. However, on the issue of breach of duty, Keane J in the Court of Appeal did not overturn Muir J’s findings: Gold Ribbon (Accountants) Pty Ltd (in liq) v Sheers [2006] QCA 335 at [326].

Responsibilities of the non-executive chair [13.680] The non-executive chair of a listed public company may be in a special position and have broader responsibilities requiring compliance with a more onerous standard of care than that applying to other non-executive directors. In ASIC v Rich (2003) 174 FLR 128 (part of the One.Tel litigation), Austin J held that Greaves, the non-executive chair of One.Tel, had a case to answer in respect of ASIC’s claim that he had breached s 180(1). It is important to note that this case did not decide that Greaves had actually breached s 180(1), only the preliminary issue – that ASIC had an arguable case. ASIC argued that Greaves, who was a chartered accountant with substantial practical experience in listed public companies, had additional responsibilities that went beyond [13.680] 681

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the purely procedural functions of chairing and running company meetings. Failure to discharge these could amount to a breach of s 180(1). The judge agreed and referred to earlier cases, in particular the judgment of Rogers CJ at first instance in the AWA Ltd v Daniels (1992) 10 ACLC 933, to support his conclusion. These proceedings were settled by agreement between ASIC and Greaves in September 2004, as a result of which: • Greaves admitted that he had contravened his duties as a non-executive director and was found liable to pay $20 million compensation to One.Tel; • he was prohibited from managing a corporation for four years; and • he was ordered to pay ASIC’s costs of $350,000: ASIC v Rich (2004) 50 ACSR 500.

Responsibilities of Chief Financial Officers [13.690] In ASIC v Vines (2003) 182 FLR 405 Austin J reviewed the role and responsibilities of chief financial officers in light of the statutory duty of care, skill and diligence. He was of the view that the role of chief financial officer encompasses the special skill that is brought to such an office (at 417-418): In the present case there is evidence that the position of chief financial officer is a recognised position in large corporations, such that there is identifiable specialised skill attaching to that office … Unless it emerges at the conclusion of the hearing that Mr Vines, though occupying a position designated “chief financial officer”, in fact occupied an idiosyncratic position not comparable with the usual or typical role of a chief financial officer, evidence of what a reasonably competent chief financial officer would do on stated assumptions is evidence relevant to the determination of the question whether Mr Vines breached his statutory duty of care and diligence

At trial, Austin J held that Vines, as Chief Financial Officer of GIO Holdings Australia Ltd, had contravened the Corporations Act 11 times and was fined $100,000 and disqualified from managing a corporation for three years: ASIC v Vines (2006) 58 ACSR 298. On appeal, the New South Wales Court of Appeal set aside five contraventions of the Corporations Act, reduced the fine imposed on Vines to $50,000 and set aside the disqualification order imposed by Austin J: ASIC v Vines (2007) 63 ACSR 505.

Delegation and reliance Why directors delegate [13.700] As the size, complexity and diversity of a company’s business grows, it becomes necessary for its directors to: • delegate many of their powers and functions to executive directors, managers and experts such as auditors; and • trust and rely on those persons to perform those functions properly. To what extent can a director delegate and rely on others inside the company to do their job properly? Sections 198D, 190 and 189 are intended to resolve 682 [13.690]

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those uncertainties. ASIC v Adler (2002) 168 FLR 253 at [372] and [451] provides some guidance on the application of these provisions.

Delegation permitted by internal rules [13.710] The internal rules of a company may expressly authorise a director to delegate functions to other officers within the company. For example, s 201K (a replaceable rule) permits directors to delegate functions to alternate directors. The same applies to companies who appoint a managing director: s 198C.

Delegation permitted by statute Authority to delegate

[13.720] Section 198D gives directors express authority to delegate their functions to other people in the corporation, subject to any contrary provisions in the company’s constitution. This section is not a replaceable rule and applies to all companies. SECTION 198D Delegation (1)

Unless the company’s constitution provides otherwise, the directors of a company may delegate any of their powers to: (a)

a committee of directors; or

(b)

a director; or

(c)

an employee of the company; or

(d)

any other person.

Note: The delegation must be recorded in the company’s minute book (see s 251A). (2)

The delegate must exercise the powers delegated in accordance with any directions of the directors.

(3)

The exercise of the power by the delegate is as effective as if the directors had exercised it.

Section 190 makes it clear that a director remains ultimately responsible for the acts of the delegate, except in circumstances where the director was able to rely on the exceptions set out in s 190(2). SECTION 190 Responsibility for actions of delegate (1)

If the directors delegate a power under section 198D, a director is responsible for the exercise of the power by the delegate as if the power had been exercised by the directors themselves.

(2)

A director is not responsible under subsection (1) if: [13.720] 683

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(a)

the director believed on reasonable grounds at all times that the delegate would exercise the power in conformity with the duties imposed on directors of the company by this Act and the company’s constitution (if any); and

(b)

the director believed: (i)

on reasonable grounds; and

(ii)

in good faith; and

(iii)

after making proper inquiry if the circumstances indicated the need for inquiry;

that the delegate was reliable and competent in relation to the power delegated.

In ASIC v Adler (2002) 168 FLR 253 at [372(11)], [372(12)] and [451], Santow J set out some factors that may be important in deciding whether reasonable grounds for reliance existed in any particular case. These included: • the function delegated being one that may properly be left to the delegate; • the extent to which a director was, or given the facts, should have been, put on inquiry; • the relationship between the director and the delegate; • the risk involved in and the nature of the transaction; • the extent of steps taken by the director; and • possibly the position of the director (whether executive or non-executive). Santow J rejected Williams’ claim that he was entitled to rely on Adler (who had a clear conflict of interest) and other officers of HIH to ensure that the transaction (the $10 million payment) was carried out in accordance with the approval process required by HIH’s board. As Santow J said, “Mr Williams could not simply leave it to others to ensure the approval process was carried out”: ASIC v Adler (2002) 168 FLR 253 at [451]. Authority to rely

[13.730] Section 189 expressly allows directors to rely on advice or information provided by employees, professional advisers, experts or other directors or officers when making decisions. SECTION 189 Reliance on information or advice provided by others If: (a)

684 [13.730]

a director relies on information, or professional or expert advice, given or prepared by:

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(b)

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(i)

an employee of the corporation whom the director believes on reasonable grounds to be reliable and competent in relation to the matters concerned; or

(ii)

a professional adviser or expert in relation to matters that the director believes on reasonable grounds to be within the person’s professional or expert competence; or

(iii)

another director or officer in relation to matters within the director’s or officer’s authority; or

(iv)

a committee of directors on which the director did not serve in relation to matters within the committee’s authority; and

the reliance was made: (i)

in good faith; and

(ii)

after making an independent assessment of the information or advice, having regard to the director’s knowledge of the corporation and the complexity of the structure and operations of the corporation; and

the reasonableness of the director’s reliance on the information or advice arises in proceedings brought to determine whether a director has performed a duty under this Part or an equivalent general law duty;

the director’s reliance on the information or advice is taken to be reasonable unless the contrary is proved.

This section establishes a presumption that reliance by a director on information or professional or expert advice provided by others is reasonable if the director acted: • in good faith; and • after making an independent assessment of the information or advice, having regard to the director’s knowledge of the corporation and the complexity of its structure and operations. This reliance rule aims to remove uncertainty raised as to the circumstances in which directors can rely on advice provided to them by other people within the company. The wording of s 189(b)(ii) has created some uncertainty by apparently imposing a more stringent obligation on a director who relies on information or advice, than that which applies when a power is delegated under s 190.

[13.730] 685

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Entrepreneurial risk taking [13.740] Directors must often make choices between two or more investment proposals or courses of action. One of the proposals may be more risky than the others because: • if successful, it will improve the company’s financial fortunes; or • if a failure, it will cause the company to suffer financial losses. If the directors vote in favour of the risky investment proposal and it subsequently fails, does it mean that the directors have breached their duty of care? The prevailing view in the case law is: • risk taking is an inherent part of industry and commerce; • the mere fact that a director participates in a decision with a foreseeable risk of harm does not necessarily amount to a breach of the director’s duty of care; and • judging whether directors have exercised the required degree of care in their decision making requires a comparison of the risk of harm to the company against the potential benefits that could reasonably be expected to accrue to the company from the proposal in question. See Vrisakis v ASC (1993) 9 WAR 395 at 765-766 and Daniels v Anderson (1995) 37 NSWLR 438 at 501-502. The statutory business judgment rule in s 180(2) is intended to confirm this view and to provide directors with a “safe harbour” against later allegations that they have breached their duty of care when a business decision turns out badly, as long as they have complied with all the requirements of the section.

The statutory business judgment rule [13.750] The “business judgment rule” is an important element of company law in the United States. The Commonwealth Government drew on this experience in developing the Australian rule. Note s 180(2), (3): SECTION 180(2), (3) Business judgment rule (2)

686 [13.740]

A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they: (a)

make the judgment in good faith for a proper purpose; and

(b)

do not have a material personal interest in the subject matter of the judgment; and

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(c)

inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and

(d)

rationally believe that the judgment is in the best interests of the corporation.

The director’s or officer’s belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold. Note: This subsection only operates in relation to duties under this section and their equivalent duties at common law or in equity (including the duty of care that arises under the common law principles governing liability for negligence) – it does not operate in relation to duties under any other provision of this Act or under any other laws. (3)

In this section: “business judgment” means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation.

The business judgment rule protects directors from personal liability for breaches of the statutory and general law duties of care, skill and diligence if they satisfy the requirements set out in s 180(2). The merits of their business judgments or decisions which satisfy these requirements will not be reviewable by the courts: Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483. Despite the shortcomings of the business judgment rule as interpreted and applied by the courts, the Commonwealth Government introduced the statutory business judgment rule to address the concerns that directors’ duties, such as the duty of care, restrain directors from taking advantage of opportunities which involve responsible risk taking.

Limitations to the statutory business judgment rule [13.760] There are two important limitations to the scope of the statutory business judgment rule. First, it only applies to breaches of the statutory duty of care in s 180(1) or the equivalent equitable or common law duties, not to other directors’ duties. Secondly, its operation is limited to “business judgments” that is, decisions (s 180(3)), made by directors: • in good faith and for a proper purpose; • without a material personal interest in the matter; • on a properly informed basis; and • rationally believing that it is in the best interests of the company.

[13.760] 687

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These limitations mean that s 180(2) will not protect directors who have failed in their duty of care and diligence to monitor the operations of a company. Nor will it protect directors who have breached their duty to prevent insolvent trading: s 588G. Santow J held in ASIC v Adler (2002) 168 FLR 253 at [387(d)] and [453] that neither Adler nor Williams were able to rely on s 180(2) because it could not be shown that they had made a “business judgment” which was “made in good faith for a proper purpose” and “without a material personal interest”. The defendant’s state of mind is also another important consideration a court will take into account when determining whether a defence under s 180(2) will succeed. In Gold Ribbon (Accountants) P/L v Sheers (2005) 23 ACLC 1,288, Muir J rejected a non-executive director’s defence based on s 180(2) on the basis that the director did not make a judgment and did not “turn his mind to whether the judgment was in the best interests of the company”: at [106]. ASIC v Mariner Corporation Ltd [13.765] ASIC v Mariner Corporation Ltd [2015] FCA 589 In this case, the business judgement rule (s 180(2)) has been successfully argued. Facts: The matter involved action against directors of Mariner for, inter alia, a contravention of s 1041H for misleading or deceptive conduct and representations in relation to an “off market” takeover bid which was announced in line with s 631(2)(b) and, if the directors were found to have contravened the Act, ASIC sought a declaration that the directors were also in contravention of s 180(1). In addition, ASIC sought a declaration of a contravention of s 180(1) independent of any other breaches of the Act. Mariner made an announcement on 25 June, in line with s 631(2)(b), that it intended to purchase shares in Austock, subject to 50% of the shareholders accepting the offer. There were in total, eight conditions to the offer, none of which related to advising that the offer was subject to finance. The announcement declared that 10.5 cents per share would be paid. ASIC alleged that the whole announcement gave rise to the inference that the offer was not subject to finance. ASIC further alleged that Mariner was reckless to whether it had adequate fronts or approved finance to pay for the expected three million dollar deal. Mariner had options to obtain finance, however, had not formally sought approval. However, it is apparent that Mariner did not expect the offer to be successful – it was said that the offer was “‘a low-risk bid … a toe in the water to put Austock in play’. The bid was intended to ‘shake the tree’” at [333]. ASIC contended that, by making the statement, Mariner were making a representation that they had secured the funds to pay for all of the shares at 1.5 cents at [429]–[430]. Decision: The court found that s 631(2)(b) did not create an obligation for Mariner to disclose the funding source in the announcement dated 25 June. It also found that the directors were not reckless as to whether or not Mariner had secured funds for the proposed offer. Instead, the court accepted that Mariner 688 [13.765]

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would have been able to obtain finance to fund the deal as Austock was substantially undervalued making it a very attractive offer. Mariner had already received interest from Arena and Morgan Stanley for Austock and were confident that they could meet any obligation under the 25 June offer at [343]. It was also held that there was no contravention of s 1041H as, in line with National Exchange Pty Ltd v ASIC (2004) 49 ACSR 369; Bodum v DKSH Australia Pty Ltd (2011) 280 ALR 639; [2011] FCAFC 98 [209]), that “[t]here is no proper basis to find that a not insignificant number of ordinary persons in the class or sub-class identified would have understood the 25 June announcement to convey the funding representation” at [343]. Further that the announcement did not convey “the funding representation” – that is that Mariner did not infer in its announcements that it had funds secured to pay for all shares in Austock at [437]. In addition, there was no legal requirement for Mariner to disclose its funding source should the offer be accepted at [342]. However, Beach J did find that, by his own admission, one of the directors, Olney-Fraser, admitted to a minor error (of little or no consequence) of s 621(3). This error was fixed within a very short period of time and Beach J deemed that this risk was not one which was foreseeable when the offer was made. (See also “mere mistake” not covered in the case but canvassed in Centro and ASIC v Rich (2009) 236 FLR 1 at [7239]-[7342].) Furthermore, it was held that, despite ASIC’s assertions that s 180(1) could still apply “even if no actual contravention by Mariner had been established” by “engaging in conduct that might only have put Mariner in contravention [of the act]”, his Honour found that this was a “bootstraps argument” and that even if contravention of the act were a “reasonably foreseeable consequence of the failure to take reasonable care and exercise diligence” in connection with the offer and takeover, any such risks were outweighed by benefit. Arguments, such as the risk of the costs of investigation and litigation by the regulator, which ASIC has had some success with in the past, failed, even the loss of reputation and damage to the confidence in the management of Mariner failed. Since its enactment in previous Corporations Law in 2000 (Corporate Law Economic Reform Program Act 1999), the business judgement rule s 180(2) as not been successfully relied upon. Although in this case, it was largely unnecessary for Beach J to excuse the decision-making on the part of the directors under s 180(2) as there was no contravention of s 180(1), nevertheless, his Honour sought to address the business judgement rule in its application to this matter. As to the five requirements of which the director bears the onus of proving, his Honour found that; there was in fact a “business judgement” which was the initiation of a takeover bid; the judgement to initiate that takeover was made “in good faith for a proper purpose”; there was no material personal interest in the subject matter; the directors had informed “themselves of the subject matter of the judgement to the extent that they reasonably believed to be appropriate” ASIC v Rich; and finally, the belief held that the takeover bid was in the best interests of Mariner was a rational one and was believed by the directors. His honour found that Olney-Fraser (and Christie and Fletcher) had [13.765] 689

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“satisfied the requisite elements of the business judgement rule and [are] entitled to its exculpatory operation” at [495], [542], [551], [561]. Furthermore, under s 189, Olney-Fraser was entitled to rely on the advice given by Minter Ellison, and the other directors were entitled to rely on the information provided by Olney-Fraser in relation to the takeover bid. All directors exercised their ordinary care in assessing the reasonableness of the advice and were not aware of any facts which would cause detriment to that reasonableness. This proceeding was ultimately dismissed as all of ASIC’s claims failed. Commentary suggests that ASIC may well appeal the decision.

Proposals for reform: A new general defence? [13.770] In recent times there have been calls by some company directors for further reform of the business judgment rule. A number of directors of Australia’s leading companies have called for an expansion of the business judgment rule to protect directors from Australian Securities Exchange (ASX) continuous disclosure rules. In March 2007, Treasury released a discussion paper calling for a review of civil and criminal sanctions in corporate law: “Review of Sanctions in Corporate Law” (March 2007). As part of its review, Treasury examined the Corporations and Financial Services Regulation Review (CFSR) support for the introduction of a general defence to replace the statutory business judgment rule contained in s 180(2). According to the CFSR, the introduction of a general defence would provide the “beneficial effect that a general protection would have on corporate decision making, by reducing the risk of liability where business decisions are made by directors that meet the proposed general criteria”. The CFSR proposal for the availability of a general defence for directors in relation to the core directors duties of good faith (s 181), care, skill and diligence (s 180), use of position (s 182), use of information (s 183) and the duty to avoid insolvent trading (s 588G) received widespread support from company directors. However, there were concerns expressed by investors and creditor groups that extending a general defence too far may in fact increase a director’s appetite for risky conduct. Directors Urge Overhaul of Corporate Law [13.775] Brett Clegg and Patrick Durkin, The Australian Financial Review, 10 March 2008 Australia’s top company directors are urging the Rudd Government to reform the corporations law to shield boards from legal action over possible breaches of disclosure and insolvent trading laws. In an exclusive round table with The Australian Financial Review, leading chairmen called for the government to introduce a new defence in the

690 [13.770]

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Corporations Act by extending the “business judgement rule”, which already offers limited protection for breaches of directors’ duties. Telstra chairman Donald McGauchie said reform was needed because directors’ indemnities were untested and had “a lot of holes in them”. “I think this legal clarification is something we all need to focus on,” Mr McGauchie said. “It may be necessary for government to give some consideration to how these things are going to be fairly managed.” The chairman of Suncorp and Tabcorp, John Story, who is also the chairman of the 22,000-member Australian Institute of Company Directors, said directors had been given a “pretty good hearing” by federal Treasury – which last year released a discussion paper on the issue – on the new defence. “What’s worrying directors or potential directors is the spectre of litigation, the associated reputational damage and the potential for ultimate financial ruin,” Mr Story said. The push for the new defence comes amid fears that the turmoil on equities markets could result in directors being exposed to lengthy and costly legal actions. Concerns have intensified after a string of high-profile corporate financial shocks at Centro Properties Group, MFS, Allco, ABC Learning Centres and others. Under the company directors’ proposal, the business judgement rule would provide directors with a “safe harbour” if they had had regard to all relevant considerations, had been motivated for the right reasons, had formed a rational decision and “done their jobs as directors”. The extended defence would also offer protection for directors from the contentious continuous disclosure laws. This is particularly relevant to directors in this market because the Australian Securities Exchange has declared the personal financial arrangements of directors – particularly whether they have entered margin loans over their shareholdings – must be revealed under continuous-disclosure laws. AGL Energy chairman Mark Johnson said the clarification of the law was desirable. “I doubt … 1 per cent [of directors] have actually really crossed the line here, but the existence of these laws means that a lot of them spend a whole lot of time worrying about that, rather than concentrating on value creation,” he said. But the push for a new defence is likely to be opposed by investor groups. “Good directors expect to be held accountable, it goes with the territory,” the deputy chairman of the Australian Shareholders Association, Stephen Matthews, said. “If directors act in good faith they have nothing to fear.” Mr Story said the obligations on directors were “onerous” and “of major concern” to directors. “Matters such as disclosure and insolvent trading – those provisions do not have the benefit of a business judgement rule.” [13.775] 691

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He said that this had made it harder to attract business figures to take board seats. “Why would experienced senior executives who are leaving that phase of life, embark … onto a potentially very unfriendly world?” The proposal for reform may be considered by the federal Minister for Corporate Governance, Nick Sherry, who has identified a range of areas requiring review – including improving the relevance of financial and directors’ reports, and examining executive remuneration. Last week, federal Treasurer Wayne Swan flagged that the government was also considering legislative options to force traders to keep the marker better informed. His move came after the ASX and the Australian Securities and Investments Commission issued warnings to market participants reminding them of the rules related to short-selling, misleading rumours and the disclosure of stock lending. The business judgement rule was added to the Corporation Act in the late 1990s. But it only operates with respect to directors’ duties under section 180 of the law – specifically, directors’ duty to exercise their power and discharge their duties with care and diligence. The rule does not operate in relation to duties under any other provisions of the act or other laws, such as the continuous-disclosure requirements. The push for an extended defence has the backing of some leading corporate counsel, who argue that a defence is necessary because of the imprecise nature of the continuous-disclosure requirements. The general counsel of Woodside Energy, Rob Cole, said he wrestled with ASX rule 3.1 – the obligation to keep the market fully informed – on a daily bases. “The fundamental difficulty with the [disclosure] rule … is that it combines an imprecise test, and that test needs to be applied in complex, fluid factual situations.” “It is a difficult test – it is not a technical test. But that is combined with the severity of an obligation to immediately disclose,” Mr Cole told the ASIC summer school last month. Over time it was inevitable that human beings would fail that test, particularly when it was going to be judged with the benefit of 20-20 hindsight by a court, he said. “There is a requirement to make snap decisions and human beings wrestle with that test,” Mr Cole said. “Systems are in place and counsels do their best, but then they have the guillotine of no defence.” A former chief general counsel at National Australia Bank, David Krasnostein, agreed it was a constant struggle to get disclosure right, timely and complete. “It is often easy to make disclosure, it is not so easy to make it complete and accurate, particularly in big organisations, global organisations [where] many parts are involved in gathering the facts, people are overseas, people are asleep.” 692 [13.775]

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But some corporate lawyers question whether the move is necessary, Clayton Utz partner Rod Halstead said a defence should not apply when the issue simply related to a question of timing. “Companies know they are required to act quickly and promptly and should have systems in place to enable them to do that.” Insolvency lawyers also questioned whether a broader defence was needed to protect directors from insolvent trading. Only one director has been jailed for insolvent trading, despite offence provisions being in place for more than 15 years. A partner at Blake Dawson, Ross McClymont, said many believed the insolvent trading provisions were “seen by some as a toothless tiger”. Neil Young, QC, said the case for stripping away the potential civil and criminal liability faced by directors had not been persuasively made and to do so would be premature. “It is difficult to see how we could require less of our directors,” he said during the keynote address to the ASIC summer school. “Directors’ actions can have a profound effect on the lives of a great number of people, be they shareholders, employees, creditors, or the public generally.”

Duty to prevent insolvent trading Introduction [13.780] A director has a duty to prevent a company from trading whilst insolvent. A company is insolvent if it cannot pay all its debts as and when they fall due: s 95A. The duty arises under s 588G. The insolvency aspects of s 588G are also discussed in Topic 19. SECTION 588G Director’s duty to prevent insolvent trading by company (1)

This section applies if: (a)

a person is a director of a company at the time when the company incurs a debt; and

(b)

the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and

(c)

at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and

(d)

that time is at or after the commencement of this Act.

… [13.780] 693

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(2)

By failing to prevent the company from incurring the debt, the person contravenes this section if: (a)

the person is aware at that time that there are such grounds for so suspecting; or

(b)

a reasonable person in a like position in a company in the company’s circumstances would be so aware.

Note: This subsection is a civil penalty provision (see subs 1317E(1)).

Requirements [13.790] A person engages in insolvent trading in breach of s 588G if: the person is a director of a company when the company incurs a debt AND the company is insolvent at the time of incurring the debt, or becomes insolvent by incurring the debt AND there are reasonable grounds for suspecting that the company was insolvent, or would become insolvent, at the time the debt was incurred AND the person is aware of such grounds, or a reasonable person in a like position in a company in the circumstances of that company, would be so aware AND the person fails to prevent the company from incurring the debt ↓ INSOLVENT TRADING

Reasonable grounds for suspecting insolvency [13.800] There must be reasonable grounds for suspecting that the company was insolvent or that it would become insolvent upon the debt being incurred. The requirement that the grounds be “reasonable” ones indicates that the issue must be determined objectively: Credit Corporation Australia Pty Ltd v Atkins (1999) 17 ACLC 756; Kenna & Brown Pty Ltd v Kenna (1999) 17 ACLC 1183. It requires an examination of the company’s circumstances at the time when the debt was incurred from the viewpoint of an ordinary, competent director: Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699; DC of T v Clark (2003) 57 NSWLR 113; ASIC v Plymin (2003) 175 FLR 124 (affirmed on appeal Elliott v ASIC (2004) 10 VR 369).

Director's state of mind [13.810] There will be no contravention of s 588G(2) unless the director was aware, or a reasonable person in a like position would have been aware, that there were reasonable grounds for suspecting insolvency. The language of s 588G(2)(b) is very similar to the language used in the statutory duty of care in 694 [13.790]

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s 180(1). It provides an objective test, with a “core, irreducible requirement of participation in management” yet enables the court to take account of any special expertise held by the individual director and the distribution of functions within the company: DC of T v Clark (2003) 57 NSWLR 113 at [108]-[110] per Spigelman CJ; see also [13.610]. A reasonable director is a person who would be able to understand what the company’s financial reports and auditor’s report show, as Tadgell J explained in Commonwealth Bank v Friedrich (1991) 9 ACLC 946.

Overlap with general duty of care [13.820] A breach of s 588G may also give rise to a breach of the duty of care and diligence in s 180(1) and under the general law. If a director has not been sufficiently watchful of the company’s financial position, so that the company continues to incur debts when it is likely it cannot repay them, it is arguable that the director was also not being “diligent” about the company’s affairs. Section 588G can be viewed as a specific application of the duty of care, diligence and skill to the situation of insolvency. Cases decided under s 588G and its predecessor have influenced recent cases on that duty. This influence is in part responsible for the more rigorous standards of care now expected of directors by s 180(1) and the general law. The statutory business judgment rule does not apply to breaches of s 588G: see note to s 180(2), at [13.750]. However, under recent proposals for reform, Treasury in its discussion paper, “Review of Sanctions in Corporate Law” (March 2007), is currently examining the merits of providing a general defence to directors involved in companies that are found to be insolvent. There are of course, many arguments that can be made for and against whether a general defence should be provided to directors who are involved in companies that are insolvent. Ultimately it will be a question of deciding the correct balance between discouraging undesirable conduct and promoting responsible risk taking.

Duties of Officers under s 601FD and the related Duty of Care Skill and Diligence [13.825] Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102 involved purported contraventions of s 180, 208(1), 601FD(1)(f)(i) and (iv). Jackson and Goff were directors of “Agricultural Land Management” (“Agricultural”) which was the Responsible Entity (RE) of “Kalgoorlie Apartment Hotel Syndicate” (“Kalgoorlie Scheme”) (MIS). Agricultural sues in its capacity as the RE of the Kalgoorlie Scheme. Jackson also spent a period of time as the company Secretary of Agricultural and Goff was the Compliance Officer for the Kalgoorlie Scheme. Jackson is, and was at the time of the disputed land sale, a Director of Bunbury Centro, a related entity, (s 79) and Goff is and was at the time of the disputed land sale the company Secretary of Bunbury Centro. Both Bunbury Centro and Agricultural have the same parent company, Kareelya. [13.825] 695

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The disputed land sale occurred when Bunbury Centro sold a Kalgoorlie property, to Agricultural so that Agricultural, as the RE for the Kalgoorlie Scheme could “acquire, develop and hold the Kalgoorlie property as a managed investment scheme for a period of 10 years following the acquisition” at [25]. The offer and acceptance for the property sale was signed on behalf of the vendors, Bunbury Centro, by Jackson and Goff and on behalf of the purchasers, Agricultural, by Jackson and Goff. The plaintiff pleaded that this sale was not in the best interests of Agricultural and alleged breaches of s 180, 181, 184, 601FD(1)(f)(i) and (iv), general law care skill and diligence. The court found that the property was in fact undervalued at the time of sale and therefore no contravention of the above sections and general law occurred in relation to the purchase price. However, Jackson and Goff admitted that they breached s 208 (s 601LC) as a contract was being entered into by Agricultural as the RE, with a related party Bunbury Centro, without member approval ss 217 – 227 or exception under ss 210 – 216. In addition, the Compliance Plan of the Kalgoorlie Scheme as updated on 20 May 2002 had not been followed. Clause 20 outlined the RE must “conduct appropriate due diligence” at [228], with a report prepared by the trust manager, on proposals to buy or sell real property of the Kalgoorlie Scheme, which must be presented at a directors meeting of the RE and tabled at a meeting of the compliance committee of the Kalgoorlie syndicate. Compliance committee reports can be dispensed with if the RE “determined that it would be in the best interest of investors to proceed with the purchase or sale” at [228]. Clause 27 states that when dealing with any related party, the compliance officer is to provide details of proposed transactions for review by the compliance committee which would sign off on all proposed transactions with a related party at [229]. A failure to adhere to the compliance plan of the MIS causes a breach of s 601FD(1)(f)(iv). In turn, this breach flows onto a contravention of s 601FD(1)(f)(i), and s 180(1) as they failed to take all steps that a reasonable person would take, if he were in the respective positions, to ensure that agricultural complied with s 208(1) at [250], [299]. Ultimately, this was found to be a contravention of s 601FD(3). It was also found that under s 79, Bunbury Centro was “knowingly concerned in” the above breaches as Jackson and Goff, as directors of both entities, had the relevant knowledge to be aware of the contravention of s 208(1), and by default the resulting contravention of s 601FD(3). The court found that a contravention of s 180(1) did not follow for Bunbury Centro as the provision does not extend to those who are “involved” at [288].

Consequences of contravening s 588G Civil remedies and civil penalties [13.830] Where a company has been placed in liquidation, the liquidator standing in the company’s shoes can initiate actions against the directors for: 696 [13.830]

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• breach of the general law duties and/or statutory duties under Pt 2D.1; • breach of the duty under ss 588G – 588M(2), which gives the liquidator the right to recover loss or damage suffered by the company because of the breach. A creditor may also sue the directors provided that the liquidator consents to the creditor commencing such proceedings: s 588M(3). Section 588G is a civil penalty provision, contravention of which can lead to action by ASIC and, if a contravention is proved, the court may impose one of the civil penalties from Table 13.7 at [13.480]: see ASIC v Plymin (2003) 175 FLR 124 (affirmed on appeal Elliott v ASIC (2004) 10 VR 369). A defaulting director who is acting dishonestly commits an offence under s 588G(3) and, if convicted, will be liable to criminal penalties.

Defences [13.840] There are four defences available to directors who otherwise contravene s 588G. The first two defences refer to a director’s “expectation” that the company is solvent, either based on their own knowledge or in reliance on someone else. It is clear that this requires a higher degree of certainty than “mere hope or possibility” or “suspecting”: Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699 (see below); Tourprint International Ltd v Bott (1999) 17 ACLC 1,543; and Powell v Fryer (2001) 159 FLR 433. It also appears that it may not be easy for directors to make use of the defence that they expected that the company was solvent because they relied on information from “a competent and reliable person”: see Manpac Industries Pty Ltd v Ceccatini (2002) 20 ACLC 1,304; ASIC v Plymin (2003) 175 FLR 124 (affirmed on appeal Elliott v ASIC (2004) 10 VR 369). Similarly, a passive director’s non-participation in the management of a company will not be accepted as a “good reason” why that director did not take part in the management of the company and will not constitute a defence under s 588H(4): Tourprint International Ltd v Bott (1999) 17 ACLC 1,543; DC of T v Clark (2003) 57 NSWLR 113. Case study Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699 (Federal Court of Australia)

[13.842] FACTS: Metropolitan were the approved tenderers for the installation of fire systems and fire prevention equipment for Raydar Pty Ltd (Raydar). Raydar went into liquidation incurring debts of $49,549 to Metropolitan. Metropolitan commenced an action against the directors of Raydar, and sought declarations that the directors of Raydar, namely Miller and Lewis, breached s 588G of the Corporations Act by allowing the company to trade whilst insolvent. Metropolitan claimed compensation for the debt that was incurred, along with interest and a declaration that the directors had breached a civil penalty order. The directors, in turn, relied on the defences available to directors under s 588H of the Corporations Act. [13.842] 697

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DECISION: 1.

The onus of proof for defences under s 588H rests on the director seeking to rely on them. The director must establish all of the elements of the defence on the balance of probabilities. The grounds on which the director forms the view as to the company’s solvency must be reasonable. This implies an objective consideration of the grounds viewed against all circumstances;

2.

The defences under s 588H require the director to “expect” solvency, which is a higher threshold test when compared with the “suspect” insolvency test under s 588G;

3.

A creditor cannot seek a civil penalty declaration, only ASIC or its delegate can apply to the court for such an order: s 1317EB.

The court rejected the defences put forward by the directors. The court was of the view that company was clearly insolvent at the time the debt was incurred to Metropolitan. The defences under s 588H were not available because the directors’ assessment concerning the solvency of the company was based on hope rather than reasonable expectations.

[13.844] A director may rely upon any one or more of four possible statutory defences in s 588H if: the director had reasonable grounds to expect, and did expect, that the company was solvent at the time and would remain solvent, even if it incurred the debt OR the director expected that the company was solvent, on the basis of information supplied to her or him by a subordinate, where the director believed on reasonable grounds that the subordinate was a competent and reliable person who was responsible for providing adequate information about the solvency of the company OR the director, because of illness or some other good reason, did not take part in the management of the company at the relevant time OR the director took all reasonable steps to prevent the company from incurring the debt ↓ NO INSOLVENT TRADING

698 [13.844]

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Figure 13.5: Summary of issues – directors’ duties of care and skill

Recent legislative reform – Personal Liability for Corporate Fault Reform Act 2012 (Cth) [13.848] This Act was made in response to reforms under the “Council of Australian Governments National Partnership Agreement to Deliver a Seamless National Economy”. The reforms were intended to “provide greater clarity and consistency in the way the COAG principles would apply”. The Act, more specifically, was intended to standardise corporate liability across jurisdictions and prevent situations where directors and corporate offices have been “held personally liable for an act by a company in day-to-day business operations, over which they could not reasonably be expected to exercise control”. The second reading speech continues that the amendments “are concerned with personal liability provisions that hold directors and other corporate offices criminally liable because an offence has been committed by the corporation. They are not concerned with circumstances where such officers may be held liable as a result of their personal involvement in the commission of an offence”. (Bernie Ripoll MP, Second reading speech 19 September 2012) [13.848] 699

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The explanatory memorandum states that the legislative instrument “aims to harmonise the imposition of personal criminal liability for corporate fault across Australian jurisdictions”. Further, it aims to: • remove personal criminal liability for corporate fault where such liability is not justified; • remove the burden of proof on defendants to establish a defence to a charge; • replace personal criminal liability for corporate fault with civil liability where a noncriminal penalty is appropriate; • where criminal liability is justified, to make clear the circumstances where such liability would apply. Examples of amendments: Section 188 – removed the criminal penalty, replacing it with civil penalty of up to $3000, with the possible extension to $200,000 for serious matters, matters which materially prejudice the interests or ability to pay creditors of the corporation. Section 601FC – removed the criminal liability for contravention of this section and changed penalty to a civil penalty provision.

DIRECTORS' DUTIES — GOOD FAITH AND PROPER PURPOSE Principles Introduction [13.850] This Topic examines the duties of loyalty and good faith, the second of the two groups of legal duties of directors and company officers outlined at the start of ([13.310]). This Topic includes a discussion of two issues typically arising in connection with the duties of loyalty and good faith. They are: • directors’ disclosure obligations under the general law and the Corporations Act 2001 (Cth) (Corporations Act); and • how a director can be excused from a breach of her or his directors’ duties. Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act) [13.852] Part 6-4—Duties and powers of directors and other officers and employees, Division 265-5—Good faith- civil obligations, Division 265-25—Good faith, use of position and use of information–criminal offences, Division 265-30—Interaction of sections 265-1 to 265-25 with other laws etc of the CATSI Act. An example of case where the Registrar of ORIC laid charges against a former native title director is in relation to the Githabul Nation Aboriginal Corporation RNTBC. Extract from the ORIC’s website: 700 [13.850]

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http://www.oric.gov.au/publications/media-release/registrar-lays-chargesagainst-former-native-title-director.

MR1516-25 – Registrar lays charges against former native title director [13.854] An investigation by the Registrar of Indigenous Corporations, Anthony Beven, has led to charges against a former director of the Githabul Nation Aboriginal Corporation RNTBC. Mr Trevor John Close has been charged with three counts of dishonestly misusing his position as a corporation director to gain an advantage for himself. It is alleged that Mr Close used the proceeds of sale from a Githabul Nation native title property to pay the rent for his private home in Sydney. It is alleged that two rental payments were made by Mr Close from corporation funds in July 2013 and one in August 2013. Githabul Nation was incorporated in 2006 and is registered under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (CATSI Act). It was established to manage the native title rights and interests of the Githabul people of northern New South Wales. On 29 November 2007 the Federal Court made a consent determination recognising the Githabul people’s native title rights and interests over 1,120 square kilometres of national parks and state forests around Kyogle in northern New South Wales. As part of the Githabul native title consent process the New South Wales Government transferred 20 parcels of public land to Githabul Nation. The proceeds of sale that Mr Close is alleged to have misused were from the sale of one of the parcels of land. Mr Close was a director of the Githabul Nation Aboriginal Corporation RNTBC from May 2009 until July 2014, when the corporation was placed under special administration by the Registrar. The charges against Mr Close have been laid under section 265-25(3)(a) of the CATSI Act. The section carries a maximum penalty of $340,000 or imprisonment for five years, or both, for two charges relating to the July 2013 payments and $360,000 or imprisonment for five years, or both, for one charge for the August 2013 payment. “Native title rights and interests must be held and used for the benefit of all traditional owners, not one individual,” said Mr Beven. “My office provides a range of services to native title bodies to improve their governance but will take action when there are failings in that governance.” Mr Close is due to appear before the Downing Centre Local Court on 2 August 2016. The Commonwealth Director of Public Prosecutions is prosecuting the matter.

[13.854] 701

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Outline of duties of loyalty and good faith [13.860] To refresh your memory, see Figure 13.3 at ([13.320]). Directors owe duties of loyalty and good faith because they are in a fiduciary relationship with the companies on whose behalf they act. As the diagram illustrates, these duties can be divided into various categories: (a)

to act in good faith in the interests of the company;

(b)

to use powers for their proper purpose;

(c)

to retain discretionary powers; and

(d)

to avoid actual and potential conflicts of interest and duty.

The duties arise under the general law and under ss 181 – 184 of the Corporations Act. The language used to describe the duties in these sections may differ from the language used by judges in law reports to describe the general law duties. Despite these differences, the general law and statutory duties are similar. The duty to avoid conflicts of interest and duty gives rise to a number of disclosure obligations for directors under the general law and the Corporations Act. These obligations will be discussed later in this Topic.

To whom are the duties owed? [13.870] According to Percival v Wright [1902] 2 Ch 421, the duties of loyalty and good faith are owed to the company, not to individual members. A number of developments have eroded this principle. Some examples are given in the following table.

Table 13.11: Extension of fiduciary duties Persons to Whom Requirements Duty May Also be Owed individual In special circumstances, eg members • where members dependent on info or advice given by directors; or • close relationship of confidence between members and directors creditors

702 [13.860]

Duty arises where company is insolvent or nearing insolvency, but duty does not give creditors the right to sue directors for breach of duty

Case Examples Coleman v Myers [1977] 2 NZLR 225; Chequepoint Securities Ltd v Claremont Petroleum NL (1986) 4 ACLC 711; Glavanics v Brunninghausen (1996) 14 ACLC 345; on appeal Brunninghausen v Glavanics (1999) 46 NSWLR 538 Walker v Wimborne (1976) 137 CLR 1; Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722; Grove v Flavel (1986) 43 SASR 410; Sycotex Pty Ltd v Baseler (1994) 51 FCR 425; Addstead Pty Ltd (in liq) v Liddan Pty Ltd (1997) 70 SASR 21; Spies v The Queen (2000) 201 CLR 603; Geneva Finance Ltd v Resource and Industry Ltd (2002) 169 FLR 152

Directors and Officers

Persons to Whom Requirements Duty May Also be Owed beneficiaries of Where trust is managed by directors trust of company – beneficiary may be able to sue for breach of trust employees

Duty may be imposed by other laws dealing with labour, consumer or environmental protection

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Case Examples Hurley v BGH Nominees Pty Ltd (No 2) (1984) 37 SASR 499; ASC v AS Nominees (1995) 62 FCR 504 No case law or Corporations Act examples

Note: In March 2005 the Commonwealth Government asked CAMAC to examine the issue of directors’ duties and whether the Corporations Act should be amended to require directors to take account of the interests of other stakeholders, including employees and customers.

Duty to act in good faith in the interests of the company Description of duty [13.880] The duty to act in good faith in the interests of the company requires directors to act “bona fide [in good faith] in what they consider – not what the court may consider – is in the interests of the company”: Re Smith & Fawcett Ltd [1942] Ch 304 at 306 per Lord Greene MR. This quote reflects the two competing concerns in this area: • the concern that directors must give proper consideration to the interests of the company in their dealings; and • the reluctance of courts to interfere with the internal management of companies by “second guessing” their management decisions.

Source of duty [13.890] The duty arises under: • the general law – in particular, from principles of equity collectively known as “fiduciary law”; and • ss 181 and 184 of the Corporations Act.

Examples of breach of duty [13.900] Depending on the circumstances in which they take place, the following actions by directors may amount to a breach of the duty to act in good faith in the interests of the company: • controlling members treating company assets as if they are assets held in their own names; • providing personal benefits to directors or particular members; • undertaking transactions with directors or particular members on terms very favourable to them; • forgiving debts owed to the company by directors or particular members; or • transferring company assets to others in an attempt to avoid recovery by creditors or receivers. [13.900] 703

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Scope of duty [13.910] The duty requires directors to act for the benefit of “the company as a whole”, not just the majority of members: Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286. It is often difficult to work out what this expression means in the context of a transaction or dealing undertaken by the company. In particular, which stakeholders can be considered to be part of “the company” for the purpose of this duty? Does it include: • the members? • the creditors? • other companies within a group of companies? • employees and the community? Each will be briefly explored in the following paragraphs.

Members [13.920] In Darvall v North Sydney Brick & Tile Co Ltd (1988) 6 ACLC 154, Hodgson J, at first instance, said that the duty required directors to have regard for the interests of both: • the company as a commercial entity; and • the members of the company. This view is reinforced by Pt 2F.1 of the Corporations Act which provides remedies to members where the affairs of the company are conducted in a manner which is “contrary to the interests of the members as a whole”.

Classes of shares [13.930] In companies with two or more classes of shares (for example, ordinary and preference shares), directors may make decisions which affect the different classes in different ways. One class of shares may benefit and the other suffer from the transaction. In those situations, the courts have focused on whether the decision was fair as between the different classes of members: see the discussion in Mills v Mills (1938) 60 CLR 150 at 164 per Latham CJ.

Creditors [13.940] If the company is insolvent or nearing insolvency then “interests of the company” includes the interests of creditors (who are, in a sense, the “owners” of the company at that time). The directors must avoid action contrary to their interests. Refer to ANZ Executors & Trustee Co Ltd v Qintex Ltd (1990) 8 ACLC 791; Walker v Wimborne (1976) 137 CLR 1; Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722; Grove v Flavel (1986) 43 SASR 410; Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50; Lyford & Glenisia Investments Pty Ltd v Commonwealth Bank of Australia (1995) 13 ACLC 900; Addstead Pty Ltd (in liq) v Liddan Pty Ltd (1997) 70 SASR 21; Linton v Telnet Pty Ltd (1999) 17 704 [13.910]

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ACLC 619; and Spies v The Queen (2000) 201 CLR 603. Section 588G reinforces the requirement that directors are to be mindful of creditor rights. However, while creditors have some limited statutory rights against directors for breach of s 588G, creditors have no right to sue directors for breach of their general law duties: Sycotex Pty Ltd v Baseler (1994) 51 FCR 425. Directors do not owe an independent duty to creditors which is enforceable by creditors: Spies v The Queen (2000) 201 CLR 603 at 1282; Geneva Finance Ltd v Resource and Industry Ltd (2002) 169 FLR 152.

Corporate groups [13.950] The duty to act in good faith in the interests of a company also applies to dealings between companies in a corporate group, such as an inter-group loan or guarantee given by one company on behalf of another within the group. Prior to the introduction of s 187 in 2000, there was some uncertainty as to the interests that a director could take into account in this context. • In Walker v Wimborne (1976) 137 CLR 1, the High Court of Australia held that the interests of the individual company to which the director was appointed were paramount, not the interests of the group of companies. To fulfil the duty, there must be evidence that the director considered the interests of the individual company, separate and alone from the interests of the group: see also ANZ Executors & Trustee Co Ltd v Qintex Ltd (1990) 8 ACLC 791; and Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50. • However, in Charterbridge Corp Ltd v Lloyds Bank Ltd [1970] Ch 62, a less stringent test was applied. The test applied was: whether an intelligent and honest person in the position of the directors could have reasonably believed that the transaction was for the benefit of the company as a separate entity. This test permits directors to have regard to group interests in addition to the interests of the separate entity. It has been applied in Australia in Farrow Finance Co Ltd (in liq) v Farrow Properties Pty Ltd (in liq) [1999] 1 VR 584 and Maronis Holdings Ltd v Nippon Credit Australia Pty Ltd (2001) 38 ACSR 404 and in the context of creditors’ interests in Linton v Telnet Pty Ltd (1999) 17 ACLC 619. Section 187 is intended to resolve these difficulties for directors of whollyowned subsidiaries by allowing them to make decisions which are in the best interests of the holding company, but not necessarily the best interests of the subsidiary. However, the difficulties remain for directors of partly owned subsidiaries. SECTION 187 Directors of wholly-owned subsidiaries A director of a corporation that is a wholly-owned subsidiary of a body corporate is to be taken to act in good faith in the best interests of the subsidiary if: [13.950] 705

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(a)

the constitution of the subsidiary expressly authorises the direction to act in the best interests of the holding company; and

(b)

the director acts in good faith in the best interests of the holding company; and

(c)

the subsidiary is not insolvent at the time the director acts and does not become insolvent because of the director’s act.

Nominee directors [13.960] Acting in the best interests of the company also raises a vexed issue for nominee directors – conflict can arise between the best interests of the company of which they are a director and the interests of the group or company (for example, a holding company) that has appointed them. Section 187 permits directors of wholly owned subsidiary companies, who were nominated by the holding companies, to have dual loyalties provided that they satisfy the requirements described at [13.950]. Difficult problems may still arise for other nominee directors including directors appointed to partly-owned subsidiaries: see Company and Securities Advisory Committee (CASAC, now CAMAC), “Corporate Groups Final Report” (2000), Ch 2. The present Australian view would seem to be that dual loyalty is possible but, in the event of an actual conflict, a nominee director’s foremost duty is to the company of which he or she is a director: contrast Scottish Co-operative Wholesale Society Ltd v Meyer [1959] 3 AC 324 and Bennetts v Board of Fire Commissioners of New South Wales (1967) 87 WN (Pt 1) (NSW) 307, with Levin v Clark [1962] NSWR 686.

Employees and the community [13.970] It was clearly established in Parke v Daily News Ltd [1962] Ch 927 that the interests of employees should not be considered by the directors ahead of the interests of the company as a whole. However, if the interests of current, as opposed to past, employees (for example, in industrial matters) can be regarded as affecting the interests of the company, then they could be taken into account. Corporate sponsorship and donations can also be justified in this way. A sponsorship deal may benefit the public but it also, indirectly, benefits the company by way of good public relations and advertising.

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Case study Parke v Daily News Ltd [1962] Ch 927 (Chancery Division of the High Court of England and Wales)

[13.975] FACTS: The Daily News Ltd was the owner of two newspapers. Both newspapers had declining sales and the board decided that it was in the best interests of the company to sell the newspapers to an external party. The board further decided to sell not only the intangible assets of the company, namely the mastheads, but also all plant and equipment. The sale of the newspaper business led to widespread job losses. Sympathetic to the past employees, the board decided to distribute the surplus funds from the sale of the business to the staff that were no longer employed by the Daily News. A minority shareholder objected to the distribution of the surplus proceeds to the past employees. DECISION: The board was not entitled to distribute the surplus proceeds from the sale of the business to its past employees because to do so would not be in the best interests of the company. This was especially the case with past employees who were no longer employed and therefore, did not provide any current or future benefit to the company.

Impact of company's internal rules [13.980] The scope of the duty to act in good faith in the interests of the company may be affected by a company’s internal rules – the company’s constitution may permit directors to take account of a particular stakeholder’s interests ahead of others: Berlei-Hestia (NZ) Ltd v Fernyhough [1980] 2 NZLR 150; and Japan Abrasive Materials Pty Ltd v Australian Fused Materials Pty Ltd (1998) 16 ACLC 1172.

Duty to use powers for proper purposes Context [13.990] The duty concerns how directors, in managing a company, exercise the powers given to them by their employment contract, the company’s internal rules and the Corporations Act: for example, s 198A, a replaceable rule listing powers of directors, and s 198C, a replaceable rule listing powers of managing directors. Depending on the particular company, directors’ powers may include the power to hire employees, to refuse to register a transfer of shares, to acquire premises, to borrow money and to issue shares and debentures.

Description of duty [13.1000] Directors are under a duty to the company to exercise their powers according to certain standards. As Dixon J said in Mills v Mills (1938) 60 CLR 150 at 180: Directors of a company are fiduciary agents, and a power conferred upon them cannot be exercised in order to obtain some private advantage or for any purpose foreign to the power. [13.1000] 707

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Source of duty [13.1010] The duty arises under: • fiduciary law, which is part of the general law; and • ss 181 and 184 of the Corporations Act.

Determining whether breach of duty [13.1020] The onus of establishing that the directors have acted improperly rests on the person(s) making the allegations: Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199. Courts adopt a two-step approach to determine whether there has been a breach of this duty: 1.

ascertain the nature of the power and the purpose(s) for which it was conferred (“the legal purpose” – there may be more than one); and

2.

ascertain from the circumstances the actual purpose or reason for which the power was exercised by the directors.

The court compares the actual purpose (Step 2) for the exercise of the power against the legal purpose(s) (Step 1). If the actual purpose for the exercise of the power is within the range of legal purpose(s), the directors have acted properly and discharged their duty. If the actual purpose is outside the legal purpose(s), a breach of duty will have taken place.

Scope of duty Legal purpose (Step 1) [13.1030] The first step – ascertaining the intended purpose of the power – involves analysing the provision that confers the power. It is normally found in the internal rules of the company. The internal rules may limit the circumstances in which the power is to be exercised. The court interprets the power in light of any such restrictions and the other internal rules of the company. In the absence of any guidance from the internal rules, courts infer what the purpose of the power is from the type of company, its internal structure and activities.

Actual purpose (Step 2) [13.1040] The second step is to ascertain the directors’ actual reason or purpose for exercising the power. This requires the court to determine what the directors subjectively believed at the time they exercised the power. It can be very difficult for the court to ascertain this information. It must be shown that the substantive purpose of the directors was improper or collateral to their duties as directors. Honest or well-intended actions by directors do not prevent the court from finding that their conduct amounted to an improper use of their power: see Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187. 708 [13.1010]

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Multiple purposes [13.1050] What if several purposes can be ascribed to the directors’ actions? The rule seems to be that the mere presence of an improper purpose will not of itself make the directors’ act invalid: Mills v Mills (1938) 60 CLR 150. If the substantive or dominant objective is improper, however, the act will be invalid: Mills v Mills at 186 per Dixon J. A gloss was added to this point in Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285, to the effect that if there are a “number of significantly contributing causes”, you must ask whether, “but for” that impermissible purpose, the directors would not have exercised the power.

Example – power to allot shares [13.1060] The most contentious power is the power to allot shares: s 124(1)(a). This issue often arises in the context of directors defending the company against a hostile takeover, or a battle for control of the company between existing members. Kokotovich Constructions Pty Ltd v Wallington (1995) 13 ACLC 1113 is a good illustration: see below. In Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483, the High Court said shares could be issued for purposes other than that of raising finance. In Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, for example, the Privy Council said of a power to issue shares, that it was impossible to say in advance what would be a proper or improper purpose. However, if the predominate purpose of the allotment of shares was to defeat a hostile takeover or to dilute the holdings of a particular shareholder the allotment would be invalid. Case study Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 (House of Lords)

[13.1070] FACTS: Ampol Petroleum Ltd owned 55% of the issued capital in RW Milller Ltd. RW Miller became a takeover target for Ampol when Ampol made a formal bid for the remaining issued capital of Miller. The bid was made public at the time Ampol made the announcement to the Australian Securities Exchange. Howard Smith Ltd, a rival company to Ampol, announced a counterbid for Miller. In attempting to resist Ampol’s takeover Miller’s board decided to allot 4.5 million additional shares. The allotment had the practical effect of reducing Ampol’s holding in Miller to 36.6%. Ampol challenged the validity of Miller’s share allotment, claiming that the allotment was principally designed to interfere with Ampol’s hostile takeover. Miller’s board, in turn, claimed that the allotment of shares was necessary to provide the company with additional capital. DECISION: The House of Lords decided that although the Miller board may have had honest intentions by issuing additional shares they had no power to make the allotment and it was therefore invalid. The allotment had the

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predominate effect of reducing Ampol’s majority holding and was designed to interfere with its attempted hostile takeover of Miller.

An allotment of shares may be invalid if: • the shares were allotted with the aim of transferring control of a major company asset (Bailey v Mandala Private Hospital (1988) 6 ACLC 43); • the dominant purpose of the allotment was to preserve the position of the existing majority members, or to displace them (Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821; Pierce v Mills & Co [1920] 1 Ch 77 (see above); Ngurli Ltd v McCann (1953) 90 CLR 425; Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285); or • the purpose of the share issue was to make the rights of the existing members valueless and there is no other demonstrable benefit to the company: Kokotovich Constructions Pty Ltd v Wallington (1995) 13 ACLC 1113. Case study Kokotovich Constructions Pty Ltd v Wallington (1995) 13 ACLC 1113 (New South Wales Court of Appeal)

[13.1075] FACTS: Mr K and Mrs W were the only shareholders and directors of Kokotovich Constructions Pty Ltd (KCPL) which was incorporated in 1972. At that time there was a close personal relationship between them. Mr K had three shares, one of which was a governing director’s share. Mrs W, who was the company secretary, had two shares. After the relationship between them broke down 20 years later, Mr K called an extraordinary general meeting which passed a special resolution removing Mrs W as director and company secretary. Mr K then called a second meeting which purported to allot a further 9,795 shares to his children, supposedly to raise funds for the company, although the evidence showed that no cash was ever paid for these shares. DECISION: The Court of Appeal agreed with the trial judge’s decision that the allotment had been made for an improper purpose and should be set aside. Its dominant purpose was to “dilute and devalue” Mrs W’s shares so that her proprietary rights in KCPL became virtually worthless. This was not a proper purpose.

Where the directors have not acted in self-interest but genuinely believe that the allotment was in the best interests of the company, even though the allotment does in some way affect who controls the company, the authorities are conflicting. The stricter approach taken by the Privy Council in Howard Smith Ltd can be contrasted with Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483, Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199 and Pine Vale Investments Ltd v McDonnell & East Ltd (1983) 1 ACLC 1294. Clearly, where a company’s assets are given away 710 [13.1075]

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to a family company for no consideration the motive is improper: Bishopsgate Investment Management Ltd (in liq) v Maxwell (1993) 11 ACLC 3128.

The “Objective” test – the difference in application between directors acting for an improper purpose and directors not acting in the best interest of the company [13.1078] In Westpac Banking Corp v Bell Group Ltd (in liq) (No 3) [2012] WASCA 157 the objective test was applied in determining whether directors had acted for an improper purpose, namely, advancing the interests of the banks above that of the company, shareholders and creditors. This appeal upheld the findings of the primary judge that the banks were liable under the first limb of Barnes v Addy (1874) LR 9 Ch App 244, however, in addition to being “knowing recipients”, the court went further finding that, consistent with the second limb of Barnes v Addy (1874) LR 9 Ch App 244, that the banks provided knowing assistance, therefore standing as constructive trustees at the time of the breach at [1123]. However, in determining whether the directors had acted in the best interests of the company there was some discussion as to whether the subjective or objective test applied. It appears that the consensus which can be drawn from the three judges discussions is that there are subjective and objective elements which must be considered by the court. That is, where a director has a subjective belief that he or she is acting in the best interests of the company and that subjective belief is unreasonable, then the objective test will apply. In that case, the directors had not acted in the best interests of the company as, at the time they entered into the loans, the directors knew or should have known that there were severe solvency issues and should have considered whether their actions would have prejudiced the interests of “non-bank” creditors. The recent decisions in Re Colorado Products Pty Ltd (in provisional liq) (2014) 101 ACSR 233 [2014] NSWSC 789; MG Corrosion Consultants Pty Ltd v Gilmour [2014] FCA 990 reaffirms the test of assessment of conduct carried out for an improper purpose is an objective one.

Section 181 – Good faith and proper purpose Description of duty [13.1080] Section 181(1) deals with the statutory duty of good faith. The good faith statutory duty has been interpreted as being broadly equivalent to the general law duties to act in good faith, in the best interests of the company and for proper purposes.

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SECTION 181(1) Good faith – civil obligations Good faith – directors and other officers (1)

A director or other officer of a corporation must exercise their powers and discharge their duties: (a)

in good faith in the best interests of the corporation; and

(b)

for a proper purpose.

Note 1: This subsection is a civil penalty provision (see s 1317E). Note 2: Section 187 deals with the situation of directors of wholly-owned subsidiaries. …

Whether or not a director has complied with the standards required by s 181(1) is to be determined objectively. Subjective good faith or belief that a purpose is proper will not be enough: ASIC v Adler (2002) 168 FLR 253 at [738]-[740]. Section 184 imposes criminal penalties for breach of the duty to act in good faith and for a proper purpose when a director is “reckless” or “intentionally dishonest”: see also Table 13.8 at [13.500].

Duty to retain discretions Context [13.1090] A company’s internal rules give its directors many powers. These powers may also be thought of as discretions, in the sense that the directors have a discretion to determine if and when to exercise those powers.

Definition of duty [13.1100] The general law imposes two duties on members of a board in respect of their discretions: • a duty to exercise an active discretion; and • a duty to retain their discretions. Due to the first duty, directors cannot unthinkingly follow the directions of another person. Due to the second duty, directors cannot delegate their responsibilities or fetter the exercise of discretions without authority. There is no direct statutory equivalent of either duty, but their breach may also result in a simultaneous breach of the general law and statutory duties of care and diligence discussed in this Topic.

Scope of duty to retain discretions [13.1110] Directors may fetter their discretions by an agreement (written or oral) to vote in a certain way in relation to the exercise of their powers. Agreements of this kind risk breaching the duty to retain discretions: see the judgment of Barrett J in Re MIA Group Ltd (2004) 50 ACSR 29 at [16]. One example of such 712 [13.1090]

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an agreement is where a nominee director agrees with their appointor to vote in a certain way. Thorby v Goldberg (1964) 112 CLR 597 provides that if the directors have entered into a contract on behalf of the company in the bona fide exercise of their powers, then they can validly agree in that contract to vote in favour of certain matters.

Limits on the duty [13.1120] The scope of the duty to retain discretions may be limited by the company’s internal rules. For example, those rules may permit the directors to: • appoint agents (such as employees) to carry out the board’s policies; • delegate functions to a managing director (s 198C, a replaceable rule); • delegate a matter to a committee of, say, senior management, as long as due consideration is given by the board to any report the committee provides (s 198D, a replaceable rule); and • act primarily in the interests of the person or company who nominated or appointed them. Sections 189 – 190 permit directors to delegate and rely on others. These provisions were outlined in ([13.310]). They may provide a defence to directors if sued for breach of their duty to retain discretions.

Contravention of good faith and proper purpose [13.1123] In Gerard Cassegrain & Co Pty Ltd (in liq) v Cassegrain [2013] NSWCA 455, it was held, inter alia, that no actual loss needs to be established for a contravention of s 181.

Background [13.1125] This case involved the directors Claude Cassegrain and Anthony Sarks transferring shares to Felicity Cassegrain (Claude’s wife and Anthony’s daughter) at an undervalued price and with the intention to deny creditors access to those assets. Clearly, such a transaction could not have been performed “in good faith for the best interests of the corporation”, nor for a “proper purpose”. This case was an appeal of Claude and Anthony and the appeal of Felicity against findings that Claude and Anthony breached ss 180, 181 and 182 of the Corporations Act. Claude and Anthony were not successful in their appeal, despite claims that the shares were not in fact undervalued. The court found that regardless of whether the shares were undervalued or not, the improper purpose behind the transfer still rendered them liable under s 181.

Consequence of contravention of s 181 [13.1128] In Allco Funds Management v Trust Company (RE services) Ltd [2014] NSWSC 1251, it was held that Companies may request a transaction to be held void where the party entered into the agreement with knowledge of the contravention of s 181. [13.1128] 713

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DIRECTORS' DUTIES — CONFLICT OF INTEREST AND DISCLOSURE Principles Duty to avoid conflict of interests Definition of duty [13.1130] All fiduciaries, including directors, are under a duty to avoid actual or potential conflict of interest situations. The duty is a strict one. A director can be in breach even though the director acts honestly and does not stand to make a profit. A director can also be liable even if the company cannot proceed with the transaction in question. Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act) [13.1132] Part 6-4—Duties and powers of directors and other officers and employees, Division 265-10—Use of position-civil obligations Division 265-15—Use of positioncivil obligations, Division 265-25—Good faith, use of position and use of information–criminal offences, Division 265-30—Interaction of sections 2651 to 265-25 with other laws etc., Division 268—Duties in relation to disclosure of, and voting on matters involving, material personal interests, Part 6-6—Member approval needed for related party benefit of the CATSI Act. The recent case concerning the former CEO of North Australian Aboriginal Family Violence Legal Service Aboriginal Corporation highlights, inter alia, misuse of position for personal financial benefits. Extract from the ORIC’s website: http://www.oric.gov.au/publications/media-release/former-darwin-ceosentenced.

ORICMR1415-35 – Former Darwin CEO sentenced [13.1134] Ms Veronica Cubillo, the former CEO of the North Australian Aboriginal Family Violence Legal Service Aboriginal Corporation (NAAFVLS), has today been sentenced in the Northern Territory Supreme Court in Darwin. Ms Cubillo was sentenced to three months imprisonment, backdated to 30 April 2015 when Ms Cubillo was first remanded in custody. After she is released Ms Cubillo will be required to serve five months in home detention. Ms Cubillo was also ordered to repay $7,624.50 to NAAFVLS via the Registrar. In handing down the sentence, Justice Blokland said that Ms Cubillo had breached her position of trust as the CEO of an Aboriginal corporation and had not accepted responsibility for her actions. Ms Cubillo was found guilty by a jury on 23 April 2015 of 11 charges brought by the Registrar of Indigenous Corporations, Anthony Beven. 714 [13.1130]

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Ten of the charges brought against Ms Cubillo related to her misusing her position and forging documents to obtain a personal financial benefit totalling $9,574.50. The eleventh charge related to Ms Cubillo intentionally and dishonestly failing to properly exercise her duties as the CEO. Ms Cubillo had directed that part of a $10,000 grant be used to fund an overseas trip to the Philippines. The funding had been provided to NAAFVLS by Imparja Television to run substance abuse workshops on Groote Eylandt. Anthony Beven said, “Ms Cubillo was the CEO of a not-for-profit corporation funded by government to assist the victims of domestic violence living in disadvantaged communities. While the amount of money involved was small, the breach of trust was significant”. “The sentence sends a strong message that it is unacceptable for the CEO of an Aboriginal corporation to use public funding meant for the most vulnerable in our community for their own personal benefit.” The matter was prosecuted by the Commonwealth Director of Public Prosecution.

Source of duty [13.1140] The duty to avoid conflicts of interest arises under the general law, as part of fiduciary law. It is supplemented by the statutory duties under ss 182 – 184 of the Corporations Act 2001 (Cth) (Corporations Act). The duty gives rise to a number of disclosure obligations, including: • the requirements in ss 191 – 194, 195, 205G (listed companies) and 200A – 200J (retirement payments); • Ch 2E (related party transactions); and • Pt 7.10, Div 3 (insider trading provisions). Listed public companies must also comply with the disclosure obligations in the ASX “Corporate Governance Principles and Recommendations with 2010 Amendments”. As well, companies are encouraged by industry associations (for example, the Investment and Financial Services Association (IFSA)) to “self-regulate” by adopting mechanisms for avoiding conflicts of interests, such as audit committees, codes of ethics and appointing more non-executive directors.

Examples of conflict of interest [13.1150] The conflict of interest issue is a very common one in practice. The following are some examples of situations where the issue of conflict of interest arises. They often overlap each other.

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Contracts with the company [13.1160] A director may be in breach of duty by entering into a contract with the company of which he or she is a director. This breach of duty may also occur where the relationship is indirect – that is, where the director is a director or member of another company which enters into the contract: see Transvaal Lands Co v New Belgium (Transvaal) Land & Development Co [1914] 2 Ch 488; and South Australia v Clark (1996) 66 SASR 199; 14 ACLC 1,019. The risk of breaching the duty to avoid conflicts of interest may be reduced by: • a provision in the constitution which authorises a director to have an interest in a contract with the company. The directors can thereby be absolved from a breach of this duty (Re Automotive & General Industries Ltd [1975] VR 454); or • the interested director making full and frank disclosure of their interest in any contract with the company (Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378; and Furs Ltd v Tomkies (1936) 54 CLR 583); and • the director abstaining from voting on the matter. Mere abstinence may not be sufficient in certain circumstances. The directors may also have an obligation to protect the company’s interest – for example, by taking steps to prevent the transaction from going ahead: Permanent Building Society v McGee (1993) 11 ACSR 260; Fitzsimmons v The Queen (1997) 15 ACLC 666; and Duke Group Ltd (in liq) v Pilmer (1999) 73 SASR 64 (these issues were not relevant to the High Court appeal in this case: Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165). The provisions of the Corporations Act mentioned under the heading “Source of duty” are particularly relevant to contracts between a director (or person related to a director) and a company. These statutory provisions need to be complied with even if the contracts are permitted by the company’s constitution.

Personal profits arising from acting as director [13.1170] Directors are under a duty not to make profits from their office. Because the opportunity exists for directors to take advantage of their privileged position, not only must they act in good faith, they must be seen to act in good faith. The leading case is Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378. Case study Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378 (House of Lords)

[13.1175] FACTS: The directors of Regal (Hastings) Ltd (Regal) owned a cinema and wanted to buy the lease of two more cinemas in order to sell the whole operation as a going concern. Regal formed a subsidiary company for this purpose and the subsidiary was offered a lease of the cinemas on the condition

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that it increased its paid up capital. Regal could not afford to provide the full amount required so the remaining capital was contributed by four of Regal’s directors and two other people taking up shares in the subsidiary. Shortly afterwards, all the shares in both Regal and the subsidiary were sold for a very large profit. The new shareholders, who now controlled Regal, caused it to sue the directors and the others involved, claiming that they had to account for the profit they made from the sale of the shares. DECISION: The directors had acted honestly and the company had benefited from their actions (Regal did not have the money to take up all the shares itself), but the House of Lords still held that the four directors had breached their duty and had to give up all their profits to the company. The House of Lords said that the directors would have been protected if they had made full disclosure to a general meeting and the meeting had approved the transaction.

The end result in a case of this kind may be different today as the court has discretion under ss 1318 and 1317S, to excuse directors and officers from liability where they have acted honestly.

Bribes and other undisclosed benefits [13.1180] Directors are in breach of duty if they accept a bribe or secret commission in return for securing (or attempting to secure) a certain course of action: Boston Deep Sea Fishing & Ice Co v Ansell (1888) LR 39 Ch D 339; and Furs Ltd v Tomkies (1936) 54 CLR 583. The company does not have to suffer any detriment for the director to be in breach.

Misuse of company funds [13.1190] Directors must use company funds for company business: Totex-Adon Pty Ltd v Marco (1982) 1 ACLC 228. They must not mix the company’s funds with their own. In Paul A Davies (Aust) Pty Ltd (in liq) v P A Davies [1983] 1 NSWLR 440, the directors partly financed a holiday resort in their own names from company funds. When the resort was sold, the court held that all the profit belonged to the company.

Taking up a corporate opportunity [13.1200] Directors are in breach of their duty if they take up opportunities which belong to the company. Any profit from such ventures must be given up to the company. The classic case is Cook v Deeks [1916] 1 AC 554. It seems that the courts generally take the view that, even if the company cannot or will not take up the opportunity, the director is precluded from doing so: see Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378; Green v Bestobell Industries Pty Ltd [1982] WAR 1; Marson Pty Ltd v Pressbank Pty Ltd [1990] 1 Qd R 264; Gemstone [13.1200] 717

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Corporation of Australia Ltd v Grasso (1994) 62 SASR 239; and Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672. Case study Cook v Deeks [1916] 1 AC 554 (Privy Council)

[13.1205] FACTS: A successful railway construction company (Toronto) was owned equally by four shareholders who were also its directors. After completing a project for Canadian Pacific Railways (CPR) three of them started further negotiations with CPR for a new contract with the intention of excluding the fourth (Cook) altogether. The three formed a new company which was awarded the new contract. They then held a general meeting of Toronto and used their 75% majority to approve the sale of part of Toronto’s plant to their new company and to declare that Toronto had no interest in the new contract. DECISION: The Privy Council held that the three directors had breached their duty of loyalty to Toronto by taking up a corporate opportunity that belonged to Toronto. It upheld Cook’s claim that the other three directors and the new company held the contract for the benefit of Toronto and had to account to Toronto for any profits resulting from it.

Perhaps the way out for a director is to obtain express authorisation of what would otherwise be a breach, by making full disclosure to, and obtaining the consent of, a general meeting to the taking up of an opportunity rejected by the company. Compare the above cases with Queensland Mines Ltd v Hudson (1978) 18 ALR 1, the Canadian case of Peso Silver Mines Ltd v Cropper (1966) 58 DLR (2d) 1 and SEA Food International Pty Ltd v Lam (1998) 16 ACLC 552, where directors were permitted to take up opportunities that had earlier been considered and rejected by the companies.

Using confidential information [13.1210] Directors are not permitted to use confidential company information for their own benefit. What is meant by “confidential information” is discussed in Thomas Marshall (Exports) Ltd v Guinle [1978] 3 WLR 116. Sections 183 and 184(3) supplement the fiduciary duty regarding the use of confidential information and secret profits. These provisions also apply to employees and are, therefore, broader than the general law. In Australian Securities & Investments Commission v Vizard (2005) 145 FCR 57 the Federal Court held that Vizard, a non-executive director of Telstra Ltd, had contravened s 183 of the Corporations Act on three separate occasions. The Court was of the opinion that Vizard had used information acquired as a director of Telstra Ltd for the purposes of benefiting himself and his family. According to Finkelstein J, the contraventions were dishonest and were carefully concealed, and only discovered by chance. 718 [13.1205]

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Competing with the company [13.1220] In general, fiduciaries must not compete with the person for whom they act. However, it seems that a person can be a non-executive director of two companies which are in competition, provided there is no other conflict of duty: Bell v Lever Bros [1932] AC 161. Where a person is engaged in special duties dealing with confidential information, there seems to be a stricter rule imposed. In Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] 1 All ER 350 there was held to be a conflict and the director was in breach. The directors in Mordecai v Mordecai (1988) 12 NSWLR 58 closed down the company’s business and set up a rival company. The court held that their aim was to benefit themselves at the expense of their nephew: see also On the Street Pty Ltd v Cott (1990) 101 FLR 234; Forkserve Pty Ltd v Jack and Aussie Forklift Repairs Pty Ltd (2001) 19 ACLC 299; and compare Southern Real Estate Pty Ltd v Dellow (2003) 87 SASR 1.

Statutory duties – improper use of position or information Misuse of position [13.1230] Section 182 reinforces the general law principle that a person in a fiduciary position (that is, a position of trust) should not make any gain by virtue of that position. SECTION 182 Use of position – civil obligations Use of position – directors, other officers and employees (1)

A director, secretary, other officer or employee of a corporation must not improperly use their position to: (a)

gain an advantage for themselves or someone else; or

(b)

cause detriment to the corporation.

Note: This subsection is a civil penalty provision (see s 1317E). …

Some case examples [13.1240] In R v Donald [1993] 2 Qd R 680, Donald was the managing director of Ardina Pty Ltd (Ardina). He and his wife acquired two other companies which entered into contracts with Ardina. Invoices submitted by the other two companies were dealt with by Donald alone, instead of being approved in the usual manner. In some cases the invoices were false. The question arose as to whether a profit had to be earned for there to be “an advantage” gained. The court (applying the High Court decision of Chew v The Queen (1992) 173 CLR 626) held that payments made to a person (“person” here meaning Donald’s

[13.1240] 719

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other companies) as a consequence of the improper conduct of a company officer, can constitute the “gaining of an advantage”, even if the person is otherwise entitled to those payments. In Jeffree v NCSC [1990] WAR 183 a director sold all the company’s business to another company which he controlled. The aim was to defeat the claims of a creditor. This was held to be an improper use of position. In ASIC v Adler (2002) 168 FLR 253 at [735] Santow J summarised the principles applicable to self-dealing and held that Adler, Williams and Fodera had misused their position by allowing the payment of the $10 million to go ahead without the knowledge of the Investment Committee or the board of HIH. Another illustration of improper use of position is Digital Pulse Pty Ltd v Harris (2002) 166 FLR 421 (on appeal Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298), where a senior employee, who had gone into business for himself in competition with the company employing him and diverted business opportunities to his own business, was held to have breached s 182.

Misuse of information [13.1250] Section 183 supplements the general law fiduciary duty to avoid conflicts: see confidential information and secret profits. SECTION 183 Use of information – civil obligations Use of information – directors, other officers and employees (1)

A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to: (a)

gain an advantage for themselves or someone else; or

(b)

cause detriment to the corporation.

Note 1: This duty continues after the person stops being an officer or employee of the corporation. Note 2: This subsection is a civil penalty provision (see s 1317E). …

This duty covers information of both a confidential and non-confidential nature. In McNamara v Flavel (1988) 13 ACLR 619, the director breached the provision (then s 229(3) of the Corporations Law) when he transferred a commercially valuable business name from a financially troubled company to a solvent company in which he had an interest. The court held that it was the manner in which the information was acquired that was important, rather than whether it was confidential.

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The expression “improperly use” refers to an abuse of power or the doing of an act which the officer or employee in question knows (or ought to know) that he or she has no authority to do: R v Byrnes (1995) 183 CLR 501; ASIC v Adler (2002) 168 FLR 253 at [567]-[577]. As to gaining an advantage from the information, in Marson Pty Ltd v Pressbank Pty Ltd [1990] 1 Qd R 264, Mr and Mrs Urban made improper use of information (that Pressbank was unable to go ahead with the purchase) to gain an advantage (a credit for $30,000) for themselves and their company. The Urbans were also found to be in breach of the provision (then s 232(2) of the Corporations Law). See also ASIC v Vizard (2005) 145 FCR 57.

Case law on breach of s 182 and s 183 [13.1255] In Hydrocool Pty Ltd v Hepburn (No 4) [2011] FCA 495, it was held that an objective test is required to assess contravention of s 182. This case involved a director of Hydrocool using his position to set up a new company and using confidential information in that new company. Hydrocool alleged breaches of ss 182 and 183. A director, Hepburn, used his position to exert influence in the negotiations for the production of a special product (license agreement) for a joint-venture consortium. He used his influence over a director of the joint-venture, Richardson to attempt to secure an advantage, namely two years future employment for himself and the “engineers”, in addition, he knew that if the employment contracts went ahead, it would put financial pressure on Hydrocool, allowing the joint-venture consortium to purchase more shares in Hydrocool, granting Hepburn greater influence over Hydrocool. These actions were found to be a breach of s 182(1) and of Hepburn’s fiduciary duty to Hydrocool. In the assessment of the contravention of s 183(1), the court found that Hepburn had also disclosed to Richardson that a large shareholder was due to dispose of its shareholding by a certain date. Hepburn was not authorised to disclose this information however he claimed that it was not confidential. The court found that whether the information was confidential or not did not matter (McNamara v Flavel (1988) 13 ACLR 619), particularly due to the fact that Hepburn disclosed this information to engender Richardson’s confidence in him, to further exert his influence. Hepburn had obtained the information in his role as a director and should not have disclosed that information. He was found to be in breach of s 183(1). Hepburn also disclosed that Hydrocool did not have the funds to continue operating past a certain date. The court found that this was a relevant disclosure relating to information which the joint-venture was entitled to know. Hepburn also disclosed legal advice which Hydrocool had obtained on a heads of agreement which was being negotiated and disclosed the negotiations of the board in relation to the employment issue. Hepburn argued that this was a normal disclosure in commercial negotiations, however, the court found that [13.1255] 721

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Hepburn obtained this information in his role as director and had disclosed it to Richardson in his attempt to secure the employment contracts and to exert his influence over Richardson and, ultimately, Hydrocool. This was found to be another contravention of s 183(1). Hepburn also failed to avoid a conflict between his duties to Hydrocool and his own interests. He breached his fiduciary duties by undertaking “collective actions”, such as creating a “them and us attitude” between Hydrocool management and the employees, encouraging the employees to share information with Richardson and attempting to get the employees, as shareholders, to encourage a restructure of Hydrocool. In addition, Clarke, an engineer, who was the manager of research was also found to be in breach of 182(1), as he was knowingly involved in Hepburn’s contravention of s 182(1) and thus contravened s 182(2). Hepburn and Clark sought exoneration under s 1318, however, were refused as it could not be said that they had both acted “honestly”.

Remedies and consequences for breach of directors' duties Common law [13.1260] The common law and equity developed a number of remedies to compensate successful plaintiff companies pursuing directors or company officers for breach of fiduciary duties including common law damages, equitable compensation, account of profits (see Cook v Deeks [1916] 1 AC 554 and Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378), rescission of contract, constructive trust and injunctions.

Civil penalties [13.1270] Sections 180 – 183 are civil penalty provisions. Civil penalties were first introduced into the Corporations Law in 1993 as a result of recommendations that were made by the Senate Standing Committee on Legal and Constitutional Affairs (Cooney Committee). Previously, breaches of directors’ duties and prohibitions against insolvent trading were subject to criminal sanctions. The Cooney Committee recommended civil sanctions for breaches of directors’ duties on the basis that courts would be more willing to impose fines rather than terms of imprisonment, which were often deemed to be harsh relative to the contravention. Civil penalties also had the advantage of requiring a lower of standard of proof (balance of probabilities) relative to the criminal standard (beyond a reasonable doubt) and were not subject to the double jeopardy rule. The maximum penalty for a civil penalty order that a court can impose under s 1317G is $200,000 for each contravention. Section 1317L requires that an application by ASIC for a civil penalty order or a declaratory order requires the court to apply the rules of evidence and procedure for civil proceedings. There has been some debate as to the exact meaning of evidence and procedure for civil penalty proceedings brought by ASIC under the Corporations Act. In Rich v ASIC (2004) 220 CLR 129, the High Court determined that s 1317L requires a 722 [13.1260]

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court to apply the law on privileges against penalties and forfeiture when hearing a matter involving a civil penalty or declaratory order. Case study Rich v ASIC (2004) 220 CLR 129 (High Court of Australia)

[13.1275] FACTS: ASIC sought declarations and orders against directors of One.Tel Ltd, a listed company which was placed into liquidation. As part of the civil proceedings, ASIC sought an order that the directors make discovery of a number of important documents. The directors objected to ASIC’s request for discovery on the basis that the civil proceedings which were initiated by ASIC would expose the directors to penalties and as such, should not be ordered to make discovery. At issue for the High Court to decide was the appropriate meaning of s 1317L of the Corporations Act which provided that “the Court must apply the rules of evidence and procedure for civil matters when hearing applications for (a) a declaration of contravention: or (b) a pecuniary penalty order”. DECISION: According to the High Court of Australia, s 1317L requires the application of the body of law which has developed in relation to the privileges against penalties and forfeitures, when deciding whether the directors should be ordered to make discovery of documents in the proceedings: see also Daniels Corporation International Pty Ltd v ACCC (2002) 213 CLR 543 at 553-554. Since the application for discovery of documents would expose the directors to a penalty the directors could not be forced to make discovery.

Criminal liability [13.1280] Where directors or company officers breach their duty recklessly or with intentional dishonesty the director or company officer may be liable for criminal prosecution. Section 184 of the Corporations Act provides that where a director or officer of the company has committed a reckless breach of their duty or are intentionally dishonest, the director or company officer has committed an offence which is punishable with a term of imprisonment of up to five years. SECTION 184 Good faith, use of position and use of information – criminal offences Good faith – directors and other officers (1)

A director or other officer of a corporation commits an offence if they: (a)

are reckless; or

(b)

are intentionally dishonest;

and fail to exercise their powers and discharge their duties: (c)

in good faith in the best interests of the corporation; or [13.1280] 723

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(d)

for a proper purpose.

Note: Section 187 deals with the situation of directors of wholly-owned subsidiaries. Use of position – directors, other officers and employees (2)

A director, other officer or employee of a corporation commits an offence if they use their position dishonestly: (a)

with the intention of directly or indirectly gaining an advantage for themselves, or someone else, or causing detriment to the corporation; or

(b)

recklessly as to whether the use may result in themselves or someone else directly or indirectly gaining an advantage, or in causing detriment to the corporation.

Use of information – directors, other officers and employees (3)

A person who obtains information because they are, or have been, a director or other officer or employee of a corporation commits an offence if they use the information dishonestly: (a)

with the intention of directly or indirectly gaining an advantage for themselves, or someone else, or causing detriment to the corporation; or

(b)

recklessly as to whether the use may result in themselves or someone else directly or indirectly gaining an advantage, or in causing detriment to the corporation.

In Kwok v The Queen (2007) 64 ACSR 307, a decision by the New South Wales Court of Criminal Appeal, the Court examined the application of s 184 of the Corporations Act. The defendant was charged with two offences under s 184 for dishonestly using his position as a director of Envirostar Energy Ltd (EEL) with the intention of gaining an advantage directly or indirectly for two other associated companies. The issue involved leases over land which had been owned by the associated companies of Kwok. Kwok failed to disclose at the relevant time his conflict of interest between his duty as director of EEL and his associated interests with the other two companies. It was alleged by the Crown that Kwok had acted dishonestly and had deliberately concealed his associated interests with the other two companies at the time EEL had entered into the lease arrangement, and had thus breached s 184(2)(a). EEL did not suffer a loss as a result of entering into the lease arrangement. At trial, Kwok was sentenced to periodic detention for 24 months (reduced to 14 months for good behaviour). On appeal, the Court of Criminal Appeal reduced Kwok’s sentence to nine months’ periodic detention. 724 [13.1280]

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In Krecichwost v The Queen [2012] NSWCCA 101, it involved an appeal against a decision imposing a term of imprisonment under s 184(2)(a) of three years and six months with a non-parole period of eight months. Ground four of the appeal was “the learned trial judge erred in failing to direct the jury of factors relevant to its consideration of whether the conduct was dishonest”. The trial judge directed the jury to charge the appellant’s honesty according to “the standards of ordinary, decent people” (Peters v The Queen (1998) 192 CLR 493) this ground was dismissed. Appeal dismissed.

“Objective test” in s 184 [13.1283] In SAJ v The Queen [2012] VSCA 243 a determination was between dishonesty under Peters v The Queen (1998) 192 CLR 493 and R v Ghosh [1982] 2 All ER 689, as applied by s 184(2). It was held that Peters v The Queen is the correct test. Peters removes the subjective criterion and dishonesty is judged according to “the standards of ordinary, decent people”. R v Ghosh has two limbs – the first deals with the jury determining if the prosecution has proved that the actions were dishonest according to ″ordinary standards of reasonable and honest people″. The second limb is the subjective test – did the defendant realise, that judged against those “ordinary standards of reasonable and honest people” was his behaviour dishonest?

Sentencing under s 182 and s 184 [13.1285] On the matter of sentencing for breach of s 184, an interesting case study is Director of Public Prosecutions (Cth) v Northcote [2014] NSWCCA 26. The case involved an appeal from a purported manifestly inadequate sentencing of director who pled guilty to s 184(2). Garling J of the NSW Court of Criminal Appeal held that the principal offence against s 184(2) of the Corporations Act, involves “a high level of seriousness of the objective criminality. Mr Northcote personally profited by over $1 M from a deliberate pre-meditated course of conduct which extended over a lengthy period of time during which, on many occasions, he was in breach of his director’s duties” At [para 120, p 29]. Garling J said the offence committed was as “at the higher end of the range for this offence” at [para 121, p 29]. His Honour added that in such a case, “nothing less than a term of full-time imprisonment served in custody is appropriate to reflect the nature and circumstances of the offence, and a penalty of such a severity as is appropriate to the offence” at [para 127, p 30]. The sentences of the District Court of NSW were quashed and, inter alia, on the s 182(2) offence the court sentenced the respondent to three years and six months. The emphatic view to such offences was evident in Garling J’s statement “I do not discount having proper and due regard to the strong subjective circumstances involving Mr Northcote, but like so many other white collar crime offenders, these have less importance than they might in other circumstances” at [para 127, p 30].

[13.1285] 725

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Opes Prime Directors Jailed [13.1287] ASIC Media Release 11-150MR, 27 July 2011 Former directors of Opes Prime Stockbroking Ltd (OPSL), Lirim (Laurie) Emini and Anthony Blumberg, have been jailed following an ASIC investigation into the stockbroker’s 2008 collapse. In the Victorian Supreme Court this morning, Justice Beach sentenced Mr Emini, the company’s former CEO, to 24 months imprisonment and ordered him to serve 12 months before being released on a recognisance release order. Former director, Mr Blumberg, was sentenced to 12 months imprisonment. Mr Blumberg will serve six months before being released on a recognisance release order. Today’s sentencing follows the guilty pleas of both men at a hearing on 19 July 2011 (refer 11-145AD). ASIC Chairman, Greg Medcraft, welcomed Justice Beach’s decision, noting that the regulator would continue to focus on deterring and dealing with illegal behaviour. “Building and enhancing confidence among investors is a key priority for ASIC. This includes taking action against directors who don’t fulfil their responsibilities.” Today’s sentences took into account the early guilty pleas of both men. “The law provides for significant discounts in cases where there is an early guilty plea. These discounts recognise an individual’s cooperation with authorities as well as facilitating the course of justice” Mr Medcraft said. Mr Emini, of Templestowe, Victoria, was convicted of two charges of dishonestly using his position as a director and one charge of recklessly using his position as a director of OPSL in order to secure bank finance. Mr Emini’s dishonesty charges related to transfers in the course of June 2006 and January to February 2008 of securities deposited by a client of Leveraged Capital Pty Ltd (of which Mr Emini was a director and shareholder) to Riqueza Holdings Limited (a client of OPSL over which Mr Emini exercised control). ASIC’s investigation identified that the June 2006 transfer of client securities (then valued at around $65 million) was used to provide collateral for a loan from OPSL to Riqueza, in circumstances where Mr Emini was not certain of Leveraged Capital’s ability to return securities to its client. The transfers which occurred in January and February 2008 were used to provide collateral (then valued at around $45 million) for the accounts of an OPSL client, Christopher Murphy, in circumstances where, through Leveraged Capital, Mr Emini had a personal interest in one of those accounts. Mr Emini’s charge of recklessly failing to exercise his powers and discharge his duties as a director related to a number of aspects including his signing of financial documentation on 20 March 2008 by which OPSL entered into a $95 million loan with ANZ to meet obligations of Leveraged Capital and altered other financial arrangements with the ANZ to the detriment of OPSL in circumstances where there was a conflict of interest in entering into those 726 [13.1287]

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arrangements, OPSL was, or would have become, insolvent and where the financial position of those companies was not fully disclosed. Mr Blumberg, of Moorabbin, Victoria, was convicted of one charge of dishonestly using his position as a director in relation to the signing of the same financial documentation on 20 March 2008 concerning the $95 million loan from ANZ Bank. The case against Mr Julian Smith, of Blackheath, New South Wales, who was also a director of OPSL and Leveraged Capital, has been adjourned for trial in the Victorian Supreme Court on 11 April 2012. The matter was prosecuted by the Commonwealth Director of Public Prosecutions. Background OPSL collapsed on 27 March 2008 when administrators Ferrier Hodgson were appointed. Ferrier Hodgson were appointed as liquidators on 15 October 2008. In addition to the criminal investigation undertaken by ASIC following the collapse of OPSL on 27 March 2008, ASIC’s investigation into OPSL has also considered how any return available to OPSL creditors might be maximised. ASIC entered into a formal mediation process with the OPSL liquidators, ANZ Bank and Merrill Lynch to consider a commercial resolution to claims by ASIC and the administrators. On 6 March 2009, (refer 09-37MR), ASIC announced that that it would provide the necessary releases to allow a settlement offer to be put to OPSL creditors. Following a meeting of creditors on 4 August 2009, (refer 09-135AD) the Federal Court approved the Schemes of Arrangement. These schemes are expected to deliver a sum of $253 million to creditors. Dividends exceeding 37 cents have been paid by the scheme administrators. © Australian Securities & Investments Commission. Reproduced with permission.

Disclosure of interests Outline [13.1290] This Topic now discusses the disclosure and voting obligations of directors which arise from their general law and statutory duties in relation to conflicts of interest. Like the duties from which they arise, the disclosure and voting obligations are imposed by both the general law and the Corporations Act. They may also arise because of the company’s internal rules.

General law [13.1300] There is a requirement that directors involved directly or indirectly in a contract with the company disclose that interest to the general meeting, not just to the chair or the board of directors: Furs Ltd v Tomkies (1936) 54 CLR 583. See also Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378 but compare the less strict approach taken in Queensland Mines Ltd v Hudson (1978) 18 ALR 1. If this [13.1300] 727

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requirement is breached, the contract is voidable at the option of the company: Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722. The general law permits a director who is a member to vote in a general meeting on a matter in which the director has a conflict of interest: North West Transportation Co Ltd v Beatty (1887) 12 App Cas 589. However, if such a director controlled the voting power, the other members might be able to bring a statutory derivative action. The director’s right to vote may also be restricted where the conflict arises in connection with a “related party transaction”.

Corporations Act – disclosure of material personal interests General statutory duty of disclosure [13.1310] Section 191 applies to directors of both public and proprietary companies and requires disclosure of any material personal interest in a matter relating to the “affairs” of the company. “Affairs” is defined very broadly in s 53. Note s 191(1), (3) and (5): SECTION 191(1), (3), (5) Material personal interest – director’s duty to disclose Director’s duty to notify other directors of material personal interest when conflict arises (1)

A director of a company who has a material personal interest in a matter that relates to the affairs of the company must give the other directors notice of the interest unless subsection (2) says otherwise. …

(3)

The notice required by subsection (1) must: (a)

(b)

give details of (i)

the nature and extent of the interest; and

(ii)

the relation of the interest to the affairs of the company; and

be given at a directors’ meeting as soon as practicable after the director becomes aware of their interest in the matter.

The details must be recorded in the minutes of the meeting. … Section does not apply to single director proprietary company (5)

728 [13.1310]

This section does not apply to a proprietary company that has only 1 director.

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Modification of the duty of disclosure by a company's internal rules [13.1320] A company’s internal rules may provide guidelines regarding disclosure and voting by directors on conflict issues. For example, directors may be required by the company’s constitution to disclose any conflicting interests. Section 194, a replaceable rule applicable to proprietary companies only, permits a director with a material personal interest in a matter that relates to the affairs of the company, and which has been fully disclosed as required by s 191, to be present at a board meeting at which the proposal is discussed. The director is also permitted to vote on the proposal and retain any benefits from the transaction despite having a material personal interest.

To summarise the statutory disclosure regime [13.1330] • the duty of disclosure in s 191(1) applies to all public and proprietary companies except for single director proprietary companies (s 191(5)); • a director must disclose any material personal interest except those interests listed in s 191(2); • if a director of a proprietary company discloses a material personal interest as required by s 191, the company’s internal rules may allow that director to vote and retain any personal benefits from the transaction in question (s 194); • a director of a proprietary company need not disclose an interest if the other directors are aware of the nature and extent of the interest and its relation to the affairs of the company (s 191(2)(b)); • a director may give fellow directors standing notice of the nature and extent of an interest (s 192); • disclosure is to fellow directors at a board meeting, not to the general meeting as required by the general law; • ss 191 and 192 take effect in addition to any general law rules about conflicts of interest and any relevant provisions in a company’s constitution: s 193.

Extent of disclosure [13.1340] It is clear that a director cannot satisfy the disclosure requirements just by making a general statement that he or she had a conflict of interest. In Camelot Resources Ltd v MacDonald (1994) 14 ACSR 437, Santow J stated that disclosure had to be of sufficient detail for the whole board to understand the benefit to the director. The amount of detail depended on the proposed transaction and the context in which it arose, but mere mention of the transaction at a meeting was insufficient. In Woolworths Ltd v Kelly (1991) 22 NSWLR 189, the majority held that formal disclosure was not required where the other directors already had full information (as they had in this case). [13.1340] 729

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Consequences of contravention of disclosure interests [13.1350] A breach of s 191(1) is a criminal offence. It is unclear what civil liability flows from the breach. A contravention of s 191(1) or of s 192 does not affect the validity of the act or matter in question: ss 191(4), 192(7); see also Roden v International Gas Applications (1995) 125 FLR 396. However, the contract may be voidable at the option of the company if the company’s constitution required the director to make disclosure and the director failed to comply with that requirement, in addition to breaching s 191(1): Camelot Resources Ltd v MacDonald (1994) 14 ACSR 437. It is also possible that s 1324 could be invoked to achieve the same result.

Corporations Act – public companies [13.1360] Directors of public companies with private interests in company transactions have additional disclosure and voting obligations under: • s 195, which applies to directors with a “material personal interest” in any matter being considered at a board meeting and imposes additional restrictions on their right to be present and vote in these circumstances – this is not a replaceable rule and so cannot be excluded or modified by a public company’s constitution (contrast s 194 which applies to proprietary companies); • s 205G, which applies to directors of listed companies. It requires them to notify the ASX of their interests in the company; • Pt 2D.2, which regulates the disclosure of directors’ retirement benefits; and • Ch 2E, the related party transaction provisions, provided that the transaction in question fits the definition of a related party transaction. The main provision is s 195. SECTION 195 Restrictions on voting – directors of public companies only Restrictions on voting and being present (1)

(1A)

A director of a public company who has a material personal interest in a matter that is being considered at a directors’ meeting must not: (a)

be present while the matter is being considered at the meeting; or

(b)

vote on the matter.

Subsection (1) does not apply if: (a)

subsection (2) or (3) allows the director to be present; or

(b)

the interest does not need to be disclosed under section 191.

Note: A defendant bears an evidential burden in relation to the matter in subsection (1A), see subsection 13.3(3) of the Criminal Code. 730 [13.1350]

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Participation with the approval of other directors (2)

The director may be present and vote if directors who do not have a material personal interest in the matter have passed a resolution that: (a)

identifies the director, the nature and extent of the director’s interest in the matter and its relation to the affairs of the company; and

(b)

states that those directors are satisfied that the interest should not disqualify the director from voting or being present.

Participation with ASIC approval (3)

The director may be present and vote if they are so entitled under a declaration or order made by ASIC under section 196.

Director may consider or vote on resolution to deal with matter at general meeting (4)

If there are not enough directors to form a quorum for a directors’ meeting because of subsection (1), 1 or more of the directors (including those who have a material personal interest in that matter) may call a general meeting and the general meeting may pass a resolution to deal with the matter.

Effect of contravention by director (5)

A contravention by a director of: (a)

this section; or

(b)

a condition attached to a declaration or order made by ASIC under section 196;

does not affect the validity of any resolution.

The effect of s 195 is to prohibit a director who has a material personal interest in a matter being considered at a board meeting from being present at the meeting and/or voting on the matter without the approval of the other (disinterested) directors or ASIC. If there is no quorum of disinterested directors the matter may go to a general meeting, as provided in s 195(4).

Related party transactions [13.1370] Related party transactions are regulated by Ch 2E of the Corporations Act. Section 207 explains the object of this set of rules.

[13.1370] 731

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SECTION 207 The rules in this Chapter are designed to protect the interests of a public company’s members as a whole, by requiring member approval for giving financial benefits to related parties that could endanger those interests.

Chapter 2E reinforces the fiduciary duties and disclosure obligations of directors of public companies discussed previously. Subject to a number of exceptions, the rules in Ch 2E provide: 1.

A public company or an entity controlled by a public company must not “give a financial benefit” to a “related party” (s 208) – note, the definition of “entity” is very broad and includes an individual company, partnership or unincorporated body: see s 9. “Control” is defined in s 50AA as the “capacity to determine the outcome of decisions … about financial and operating policies”;

2.

“Related parties” is defined in s 228 and includes: • directors and spouses or de facto spouses of directors of the company; • directors and spouses or de facto spouses of directors of an entity that controls the company; • relatives (parents and children) of those persons; and • entities controlled by directors or their relatives.

3.

“Giving a financial benefit” is defined in s 229. It includes giving a financial benefit indirectly, by making an informal, oral or non-binding agreement and also includes a financial benefit that does not involve the payment of money: s 229(2). The following specific examples are set out in s 229(3): • giving or providing finance or property; • buying, selling or leasing an asset; • supplying or receiving services; • issuing shares or granting options; and • taking up or releasing an obligation.

4.

Exceptions to the prohibition include: • the provision of reasonable remuneration (salary, fringe benefits, insurance premiums, superannuation and so on) (ss 211 – 212); • advances of up to $5,000 made to related parties (s 213) (previously the amount was up to $2,000 and has now been increased to $5,000 following amendments made by the Corporations Legislation Amendment (Simpler Regulatory System) Act 2007 (Cth) which took effect from 28 June 2007); • arm’s length (commercial) transactions (s 210); • financial benefits to related parties in their capacity as members, for example, dividends (s 215); and

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• benefits approved by the members in a general meeting where: – full information has been given; – proper notice of the meeting has been given; and – the interested parties do not vote: ss 208, 217 – 227. 5.

Contravention of s 208 does not invalidate a transaction and is not an offence by the public company or entity: s 209(1). However, a person who is involved in a contravention breaches s 209(2) which is a civil penalty provision. If the involvement is dishonest, that person commits a criminal offence: s 209(3).

ASIC v Adler (2002) 168 FLR 253 (largely affirmed on appeal Adler v ASIC (2003) 179 FLR 1) is a very clear illustration of a related party transaction: • the $10 million paid by HIHC was clearly a “financial benefit” given to each or any of PEE, Adler Corporation and Adler; • PEE, Adler Corporation and Adler were all “related parties” under s 228; • the financial benefit did not come within the arm’s length exception in s 210; • the financial benefit had not been approved by shareholders as required by Ch 2E and so contravened s 208; • Adler and Willliams (and to a lesser extent Fodera) were involved in the contravention (s 209): see ASIC v Adler at [171]-[217]. Figure 13.6: ASIC v Adler (2002) 168 FLR 253 (Largely affirmed on appeal (2003) 179 FLR 1)

TRANSACTIONS 1.

$10 million loan by HHIC to PEE, formation of AEUT. [13.1370] 733

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Issue of A class units by AEUT to Adler Corp. Issue of B class units by AEUT to HHIC. 2.

Purchase of shares in HIH by AEUT on stockmarket for $3.99 million.

3.

Purchase of shares in unlisted technology and internet companies by AEUT from Adler Corp for an estimated loss of $3.8 million.

4.

Unsecured loans of more than $2 million by AEUT to companies and interests associated with Adler and Adler Corp.

Figure 13.7: Disclosure and voting rules where conflict of interest exists

Exoneration and relief for breach of duty Outline [13.1380] A director may be excused from civil liability arising from a breach of the director’s general law duties outlined in this Topic by: • the members in general meeting – ratification; • the company’s internal rules; or • the court.

734 [13.1380]

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| TOPIC 13

Ratification by the general meeting [13.1390] Directors may be excused from general law liability if the general meeting ratifies their actions – for example, the general meeting may accept a conflict of interest and give their approval where full disclosure is made. If the directors in Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378 had obtained approval, they would have been allowed to keep their profits. The general meeting may also ratify actions of directors who use their powers for improper purposes: Bamford v Bamford [1970] Ch 212. In Hogg v Cramphorn Ltd [1967] Ch 254 the court adjourned the case to enable a meeting to be called to ask the members for their opinion and the members ratified what the directors had done. In Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666 the ratification came before the action – the directors asked for prospective approval and were granted it. Again, the directors must have made full disclosure.

Ratification is not available where [13.1400] • it would constitute a fraud on the minority – Ngurli Ltd v McCann (1953) 90 CLR 425 (see [13.1370]); • the company is near insolvency and it would prejudice creditors – Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722; Sycotex Pty Ltd v Baseler (1994) 51 FCR 425; • it would defeat a member’s personal right – Residues Treatment & Trading Co Ltd v Southern Resources Ltd (No 4) (1988) 51 SASR 177; • it would be oppressive – Pt 2F.1; or • for breaches of statutory duties.

[13.1400] 735

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Figure 13.8: Ratification by the general meeting

By the internal rules [13.1410] At general law it was possible to have a constitution which excused directors from liability for certain breaches of duty: see, for example, Re City Equitable Fire Insurance Co Ltd [1925] Ch 407. However, purported exemption and indemnification clauses have been prohibited by statute for many years. The current provisions were simplified and rewritten by the Corporate Law Economic Reform Program Act 1999 (Cth) without changing the substantive effect of the previous rules. Section 199A(1) prohibits a company from exempting a director from liability to the company. Similarly, s 199A(2) specifically prohibits indemnification against the following liabilities (other than for legal costs) incurred as an officer or auditor: • a liability owed to the company; • a liability under a civil penalty order; or • a liability owed to someone other than the company that did not arise out of conduct in good faith. The company is allowed to indemnify directors against liability for legal costs incurred in defending an action except in the circumstances set out in s 199A(3) – namely, when the defence is unsuccessful. Note also s 199B. This provision prohibits a company (or related bodies) from paying premiums for insurance against liability for: 736 [13.1410]

Directors and Officers

| TOPIC 13

• wilful breaches of duty; or • contraventions of ss 182 or 183. However, it is possible for the company to insure its directors and officers against liability for: • non-wilful breaches, other than breaches of ss 182 and 183 (see also s 199A(2)); and • the costs of defending proceedings whether civil or criminal and whatever their outcome: s 199B. Any purported exemption, indemnification or insurance that contravenes s 199A or 199B is void: s 199C. The difficulties faced by directors and officers in obtaining adequate insurance against personal liability are discussed in detail in the June 2004 Report by CAMAC, “Directors and Officers Insurance”.

By the court [13.1420] Under s 1318, officers may be relieved of liability if they have acted honestly and, according to the court, “ought reasonably to be excused”: see Edwards v A-G (NSW) (2004) 60 NSWLR 667. Breaches of the civil penalty provisions may be treated similarly under s 1317S: see Kenna & Brown Pty Ltd v Kenna (1999) 17 ACLC 1183. Note that it is unclear whether breaches of the statutory duties in Pt 2D.1 can be excused or ratified by either the members in general meeting or the company’s constitution. Only the court may have this power. This issue will be considered by the High Court when it hears the appeal from the decision of the Full Supreme Court of South Australia in Carabelas v Scott (2003) 177 FLR 334, holding that the persons who were the only directors and shareholders of a company had the power to excuse a potential breach of a general law duty that could also amount to a breach of statutory duty. Leave to appeal to the High Court of Australia was granted on 12 August 2004.

[13.1420] 737

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Figure 13.9: Issues arising in relation to breaches of fiduciary duties by directors and other officers

738 [13.1420]

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| TOPIC 13

Figure 13.10: What happens if duty breached?

[13.1420] 739

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Figure 13.11: Statutory penalties

Revision questions 1

Mr Shifty, Ms Avoider and Mr Marginal call to make an appointment with your firm, Fees Ruthless, solicitors. You have been asked to establish their new company (No-Tax Agents Pty Ltd). You advise them not to bother with their own constitution, but instead to rely on the replaceable rules in the Corporations Act. Advise who should be appointed as directors of their company in view of the following information: (a)

Mr Shifty states that he does not want to be appointed a director or secretary. He suggests instead that: • his family company be appointed as a director; and • the company not have a company secretary;

(b)

740 [13.1420]

Ms Avoider is currently unavailable for meetings as she has five months still to serve for her last conviction for falsifying company accounts;

Directors and Officers

(c) 2

3

| TOPIC 13

Mr Marginal is 72 years old and has Alzheimer's disease. A trustee has been appointed to administer his estate.

In view of his difficulties with Mrs Evader and Ms Ethical, Mr Shifty wants to appoint his son, Sam, as a director and company secretary of No-Tax Agents with a view to Sam eventually becoming the managing director. Sam is 25 years old and is presently studying for a business degree in the United States. Ms Avoider supports this appointment but Ms Ethical is strongly opposed to it. Mr Shifty would like to remove Ms Ethical from the board. In order to ensure that he has full control over any future appointments to the board he wants the company to adopt a constitution providing that a person can only be appointed as a director with his consent. (a)

How can Sam be appointed as a director and company secretary of No-Tax Agents? Are there any legal barriers to this appointment?

(b)

How can Ms Ethical be removed from the board?

(c)

Advise Mr Shifty about the proposed constitution for the company.

In April 2011, Earl became the managing director of a newly registered company, Go-Carts Limited (Go-Carts). Go-Carts at that time controlled a chain of successful go-karting venues and was in a strong financial position. In December 2011, a liquidator was appointed to Go-Carts. An investigation of the affairs of Go-Carts by the liquidator disclosed a probable shortage of funds of over $3 million. Although there had been a steady increase in Go-Carts' sales of tickets into the go-karting venues from 2010 to 2011 (resulting in substantial trading profits), the liquidator reported the following: (a)

the purchase of a $4 million chateau in France with funds from Go-Carts which, upon resale, was only likely to realise $3 million – representing an expected net loss of $1 million;

(b)

the purchase of new motorised sweepers designed to collect litter on the go-karting tracks which, despite high hopes at the time and potentially large (labour) cost savings, subsequently proved to be unsuitable and had to be replaced at a net cost of over $800,000;

(c)

that $200,000 is due from Shrewd Advisers Ltd (Shrewd), Go-Carts' investment advisers, a company of which Earl is the governing director and majority shareholder. There is a guarantee by Shrewd in favour of Go-Carts for $100,000 but, given Shrewd's financial position, no more than $70,000 is likely to be recovered. Earl did not disclose his interest in Shrewd Pty Ltd to the Go-Carts Board, although they knew about it; and [13.1420] 741

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(d)

Earl had himself fraudulently misappropriated about $1 million to finance his extravagant lifestyle. Fraud charges against Earl are currently being heard by the county court. The directors of Go-Carts during the period 2009-2010 were: • Earl, as Managing Director and Chair; • Elisabeth Deal, a partner of a leading firm of chartered accountants; • Enid Patton, a highly regarded doctor who sits on several public company boards; • Eleanor Arnold, a public relations consultant and go-karting enthusiast. Eleanor was ill for much of 2008 and was unable to attend board meetings or take any part in the company's management.

The day-to-day management of Go-Carts was left to Earl. The nonexecutive directors conceived their role to be planning and policymaking. There is no evidence of wilful neglect or default by any of the non-executive directors, who were all deceived by Earl, as were the auditors. Advise the liquidator whether she should pursue any of the nonexecutive directors for compensation. 4

5

Citrus Ltd, a gold mining company listed on the ASX, is currently the subject of a hostile takeover from Anglo Brit Ltd. Prior to Anglo Brit's announcement, the market capitalisation of Citrus Ltd is currently $100 million and its pre-takeover share price is $1.00. Anglo Brit has offered $1.20 per share for Citrus, representing a 20% premium. The directors of Citrus Ltd devise an ingenious plan to defeat the takeover. The board manages to convince one of its directors, Mr Lang, to be provided with an interest-free loan worth $20 million. The loan was for the purpose of purchasing shares in Citrus Ltd in order to push up the company's share price. This will mean that Anglo Brit will have to offer more to the Citrus shareholders if they are to successfully take over the company. (a)

Have the directors of Citrus Ltd breached their directors' duties (in particular duty to act for good faith in the best interests of the company and for a proper purpose) in relation to the loan that has been advanced to Lang?

(b)

Can Anglo Brit Ltd take legal action against Citrus Ltd in relation to the latter's conduct and tactics concerning the hostile takeover?

Roberta is the managing director of Eternal Youth Pty Ltd (EY), a profitable company specialising in buying and selling anti-ageing cosmetics and shampoos for sensitive hair. The market for EY's products

742 [13.1420]

Directors and Officers

| TOPIC 13

are women between the ages of 40 and 70 years. While at the hairdresser's having a power perm, Roberta chats to her hairdresser, Leonardo. Leonardo asks Roberta whether her company would be interested in helping him to market a new organic hair soap called “Wonder Bar”. Leonardo claims that the soap prevents male hair loss. Roberta tells Leonardo that her company would not be interested because it sells women's products only. She offers to help Leonardo herself. Leonardo agrees. Roberta and Leonardo set up a company called Wonder Hair Soap Pty Ltd (WHS) and become its directors and members. Roberta is the majority member. The business of the company is an overnight success. At a board meeting of EY six months later, Roberta proposes that EY enters into a long-term contract with WHS to buy supplies of the organic hair soap for resale. The board agrees and, as part of the contract, Roberta negotiates with the board that she will be paid a small commission on each sale because she drew the board's attention to this new product opportunity. EY makes large profits from selling the soap overseas. EY learns that Roberta is the majority member in WHS. They seek advice on the following:

6

(a)

Has Roberta breached any of her directors' duties owed to EY? Which (if any) has she breached and why has she breached them?

(b)

Should Roberta have been present at the board meeting when the contract with WHS was discussed and voted on?

(c)

Should the contract also have been disclosed to the general meeting for approval before EY went ahead?

(d)

What general law or statutory remedies (if any) should EY seek against Roberta?

(e)

What statutory penalties (if any) can be imposed against her? Who can impose them?

Tina is the editor of and an executive director of XYZ Pty Ltd (XYZ) which publishes a free lifestyle magazine widely distributed in Melbourne. The magazine relies heavily on its advertising revenue. Tina became dissatisfied with her position in the company and decided to leave and set up her own competing publication. Before she resigned she sent letters to many of the businesses advertising in the magazine, inviting them to transfer their business to her new publication. She compiled the list of persons to whom she wrote from memory and publicly available sources of information such as the White Pages and other directories, not from XYZ's records. Three days after posting these letters Tina resigned from XYZ. Her new magazine was published the following week and many of the businesses she had contacted transferred their [13.1420] 743

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advertising to it. Advise XYZ: (a)

whether Tina has breached her fiduciary duties or any provisions of the Corporations Act; and

(b)

if Tina has breached any general law or statutory duties, what remedies might be available to XYZ?

744 [13.1420]

TOPIC 14 Remedies for Members Membership ................................................................................... Becoming a member ........................................................................ What is the nature of a share?............................................................. Ceasing to be a member ................................................................... Register of members ......................................................................... Disclosure of interests........................................................................ Substantial shareholders .................................................................... Transfer of shares ............................................................................. Restrictions on the transfer of shares .................................................... MEMBERS’ RIGHTS AND REMEDIES...................................................... Personal rights and remedies .............................................................. Enforcement of personal rights: Foss v Harbottle..................................... General statutory rights and remedies .................................................. Restitution rights of members ............................................................. Other Rights and Remedies ................................................................

[14.10] [14.20] [14.40] [14.50] [14.70] [14.110] [14.120] [14.130] [14.180] [14.200] [14.220] [14.390] [14.400] [14.830] [14.850]

Extract from J Yogaratnam and L Xynas, Corporations Law: In Principle (10th ed, Lawbook Co., 2017), Chapters 9 and 14.

MEMBERSHIP Principles [14.10] Generally, members are the shareholders of a company. The words are often used interchangeably. However, strictly speaking, they are not synonymous because, in companies limited by guarantee, no shares are issued. The Corporations Act 2001 (Cth) (Corporations Act) prescribes that every company must have at least one member: s 114. A proprietary company is allowed to have a maximum of 50 non-employee members: s 113. There is no maximum for a public company. A company may be a shareholder (member) of another company. However, the Corporations Act imposes restrictions on a company acquiring its own shares, and acquiring control over its own shares, or, if it is a subsidiary of another company, shares in its holding company: Pt 2J.2, see Topic 15. Persons under 18 years of age may be members of a company and will sometimes have their shares held on trust. Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act) [14.12] Part 1-2 Division 6-15; Chapter 4—Membership and Observers; Chapter 12—Transfer of registration, deregistration and unclaimed property of the CATSI Act.

[14.12] 745

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On the matter of membership and participation of women on the board of directors, Indigenous corporations have a more balanced inclusion of women than mainstream corporations. Extract from the ORIC’s website: http://www.oric.gov.au/publications/media-release/women-lead-wayaboriginal-and-torres-strait-islander-corporations.

MR1314-08 – Women lead the way in Aboriginal and Torres Strait Islander corporations [14.14] The Registrar of Indigenous Corporations, Anthony Beven, has today released his fifth report on the top 500 Aboriginal and Torres Strait Islander corporations. The report covers the 2011–12 financial year and looks at the overall income, geographic distribution and sectoral information of the 500 highest earning corporations registered under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (CATSI Act). The report is based on data supplied to the Registrar by Aboriginal and Torres Strait Islander corporations in their audited financial statements and general reports. Some of the key findings of this year’s report include:

• Women continue to play a dominant role in the governance of corporations. The representation of women on the board of directors stood at 54.9 per cent, an increase of 2.1 per cent since 2007–08.

• The gender composition on boards varies depending on a corporation’s income, geographic location and sector in which the corporation operates. … “The report clearly shows that Aboriginal and Torres Strait Islander corporations are leading the way in terms of gender equality. Also the emerging picture in terms of growth in income and employment is very encouraging with both exceeding 10 per cent in 2011–12,” Mr Beven said.

Becoming a member [14.20] It is important to know whether a person is a member of a company or not for various reasons such as entitlement to vote, entitlement to dividends, liability for calls on partly paid shares or the capacity to bring a statutory derivative action or an action in oppression. Section 231 defines who is a member of a company. SECTION 231 Membership of a company A person is a member of a company if they: (a) 746 [14.14]

are a member of the company on its registration; or

Remedies for Members

| TOPIC 14

(b)

agree to become a member of the company after its registration and their name is entered on the register of members; or

(c)

become a member of the company under section 167 (membership arising from conversion of a company from one limited by guarantee to one limited by shares).

A person who is specified (with that person’s consent) as a proposed member in a company’s application for registration becomes a member of the company on its registration: s 120(1). In relation to s 231(b), note that a person may agree to become a member after the company is registered either because they have: • taken up qualification shares (as a director, if this required by a company’s internal rules); • applied for and received an allotment (issue) of shares; • accepted a transfer of shares – for example, bought the shares from an existing shareholder; • received the shares by transmission on the death, incapacity or bankruptcy of a member; • exercised an option over shares (see Topic 15 at [15.250]); or • converted convertible notes into shares: see Topic 15. In Australian Securities and Investments Commission v Wellington Capital Ltd [2012] FCA 1140, it was held that unit holders may become members where an authorised in specie transfer of shares has occurred. In such a case, unit holders must have consented to the constitution/scheme when they applied to become unit holders and therefore, the unit holders are deemed to have consented, consistent with s 231, to becoming members of the company at [63].

Restrictions on who can be a member [14.30] A company’s internal rules can impose restrictions on who is eligible for membership. Many proprietary companies have restrictions on transfers of shares because, for example, the existing (family) members want to limit who may become involved in the business. For public companies listed on the ASX (Australian Securities Exchange), the ASX Listing Rules prohibit any such restrictions. This is to ensure that our securities market can compete globally. Despite this, the internal rules can place restrictions upon a particular class of shares in the company, for example in Ricegrowers Limited trading as SunRice there are A Class Shares, which may only be issued to active rice growers and B Class Shares, which can be held by active rice growers and individuals who have been rice growers in the past: see https://www.sunrice.com.au/corporate/policies-and-documentation. [14.30] 747

Business and Corporate Law

What is the nature of a share? [14.40] A share in a company is personal property. Note s 1070A(1) – (2): SECTION 1070A(1)-(2) Nature of shares and certain other interests in a company or registered scheme (1)

A share, other interest of a member in a company or interest of a person in a registered scheme: (a)

is personal property; and

(b)

is transferable or transmissible as provided by:

(c) (2)

(i)

the company’s, or scheme’s, constitution; or

(ii)

the operating rules of a prescribed CS facility[*] if they are applicable; and

is capable of devolution by will or by operation of law.

Paragraph (1)(c) has effect subject to: (a)

(b)

in the case of a company: (i)

the company’s constitution (if any); and

(ii)

any replaceable rules that apply to the company; and

(iii)

the operating rules of a prescribed CS facility[*] if they apply to the share or interest; and

in the case of a scheme: (i)

the scheme’s constitution; and

(ii)

the operating rules of a prescribed CS facility[*] if they apply to the interest.

* that is, for listed companies or schemes – CS stands for clearing and settlement facility

What does “personal property” mean in this context? There have been several interpretations given in the case law: for example, Borland’s Trustee v Steel Bros & Co Ltd [1901] 1 Ch 279; and Gambotto v WCP Ltd (1995) 182 CLR 432. Some points to note: • in legal terminology, a share is a form of intangible property called a “chose [thing] in action”; • a share represents an interest in the company and includes the rights and obligations set out in the company’s internal rules and the Corporations Act; and • a share is an interest of a shareholder in a company measured by a sum of money, but does not confer on the shareholder a proprietary interest in the assets of the company: see Chapter 8 (Yogaratnam). 748 [14.40]

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| TOPIC 14

Ceasing to be a member Companies with a share capital [14.50] A person (including a company, see s 9) ceases to be a member of a company with a share capital: • by selling all their shares in the company and the company registering the transfer; • through having all their shares bought back by the company and the transfer to the company being registered (see Topic 15); • when all their shares are cancelled following a selective reduction of capital under ss 256B and 256C; • when all their shares are transferred involuntarily pursuant to a scheme of arrangement, or the compulsory acquisition provisions (see Chapter 23 (Yogaratnam)), or a lien provision in the company’s internal rules on partly paid shares, and the transfer is registered; • if the company is deregistered by ASIC; • upon death or bankruptcy – legal ownership of the shares passes by transmission to the deceased members’ personal representative or the trustee in bankruptcy, who may or may not choose to become registered as a member (s 1071B(5) – (10)); or • following forfeiture for non-payment of calls.

Companies limited by guarantee [14.60] A person (including a company) ceases to be a member of a company limited by guarantee: • when they resign, or their membership is terminated, in accordance with the company’s internal rules; • if the company is deregistered by ASIC; or • upon death or bankruptcy: see [14.50].

Register of members Maintenance and inspection of registers [14.70] All companies (and registered managed investment schemes: see Chapter 22 (Yogaratnam) must keep a register of their members which contains certain prescribed information: ss 168 and 169. The register must be kept at the company’s registered office or its principal place of business. Alternatively, the register may be kept at a place (such as an accounting firm) where maintenance of registers is carried out, or another place approved by ASIC: s 172. The register may be kept electronically: s 1306. In addition to the right to inspect under s 173(1), a corresponding right is also found in s 1300 which requires a company to make the books available for inspection. Section 1300(3) enables the requestor to copy the register which [14.70] 749

Business and Corporate Law

means the person can make copies of or take extracts from the books. It should be noted that both these provisions are strict liability clauses should the company fail or refuse these requests.

Court's power to create a register [14.72] In the case of Taylor (Trustee) Re Kwok v Goldana Investments Pty Ltd (Receivers and Managers appointed) (No 2) [2015] FCA 947, the Federal Court affirmed the decision in Re Mogul Stud Pty Ltd [2012] NSWSC 1639 that the court has a power at general law to create a register. Wigney J, interpreted s 175 of the Corporations Act broadly as a beneficial provision and “considered s 175 against the background of the general law power to rectify a register which would appear to be sufficiently broad to enable a register to be created where the original has been destroyed or cannot be located” at [18].

Fee to inspect a register [14.74] Registers may be inspected by members free of charge; others may have to pay a fee: s 173. Since 2010 companies have had the ability to prevent people from getting copies of the register unless they satisfy a “proper purpose” access test: s 173(3), (3A). In AXA Asia Pacific Holdings Ltd v Direct Share Purchasing Corp Pty Ltd [2009] FCAFC 15 it was held that the fee charged must be a reasonable amount and must not exceed the marginal cost to the company of providing the copy. The Federal Court held that in interpreting under s 173(3) as to the prescribed fee reference can be made to the Corporations Regulations 1.1.01. In that case, AXA provided the register on CD-ROM for a fee of $17,195.39. AXA submitted that the fee was based on the fact that AXA subcontracted the service to maintain its own register and fee of $17,195.39 was the cost accrued to AXA for accessing its register under the agreement with the subcontracted service provider. The Federal Court held that reasonableness in relation to the fee was to be determined with reference to the cost to the subcontracted service provider in producing the copy of the register. Pursuant to Corporations Regulations 1.1.01 and schedule 4, item 3(b), the prescribed amount that can be charged to access the register kept on a computer is a reasonable that does not exceed the marginal cost to the company of providing a copy. In this case the Full Federal Court held that the “reasonable charge” was $250 as that would represent the marginal cost to the AXA and not $17,195.39. AXA was ordered to pay Direct Share Purchasing $16, 945.39, being the difference between the $17,195.39 fee paid and $250 and court costs. The fact that the subcontracted service provider actually charged AXA such an exorbitant fee and the fact that the service provider charged a similar fee to other clients was irrelevant. This case reflects the fact that courts are willing to look at the actual marginal cost and not an inflated fee negotiated under agreements which deter third parties from accessing copies of their register. 750 [14.72]

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| TOPIC 14

Protecting shareholders/members from predatory behaviour [14.76] There are generally two competing interests when accessing the register. On the one hand there is the public right to know identity of the company shareholders (s 173(1)) and then there is the right of shareholder to have their privacy protected. The use of registers, without company approval, for predatory purposes, for instance to generate mailing lists for purposes other than the sending of information relevant to the shares is prohibited under s 177: see O’Brien v Sporting Shooters Association of Australia (Vic) [1999] 3 VR 251; Westgold Resources NL v Precious Metals Australia Ltd (2002) 171 FLR 20. In the case of IMF (Australia) Ltd v Sons of Gwalia Ltd (Administrator Appointed) (2005) 143 FCR 274, the prohibition for use or disclosure of information from the register in s 177(1) and the exception to the prohibition in s 177(1A) which permits the use of information in certain defined ways was examined. This case involved the funder of litigation (IMF) asserting that the ability to use information contained in a share register should be permitted in circumstances where it is relevant to any action that may be taken arising out of the acquisition, holding or disposal of the interests recorded in the register. However the efforts to contact shareholders who have disposed of their shares about proposed legal proceedings could be viewed as soliciting services for purposes of a prospective class action, especially since there is no longer “holding of interests” since the very interests in the shares in question has been disposed of. Moore J held that (at [13]-[15]): The purpose of the amendment [s 177(1A)] was to protect privacy, and in my opinion, the construction of the section should give primacy to that object. It is consistent with the approach to confine the field of operation of the exception to that marked out by the ordinary and natural meaning of the words used. The information must have relevance, in that sense, to the act of holding the interest or to the exercise of relevant rights. In the present case, the proposed conduct is not, in my opinion, relevant to the holding of an interest or the exercise of rights attaching to them… The proposed litigation has no bearing, even indirectly, on whether the shareholders will or will not hold shares in Sons of Gwalia Ltd…. While participation in the proposed litigation may depend on a person being a shareholder in the Company and involves the exercise of rights… they are not rights attaching to shares. There is not the necessary and direct connection between the right and the shareholding.

Emmett J held that (at [63]-[64]): An object of the Act is to create rights for compensation for shareholders and other persons who suffer damage as a result of contraventions of the Act. Accordingly, s 177(1) may not inhibit use of information in order to communicate with members concerning their potential rights, as shareholders, to bring or join in an action against a company for relief against oppression or to bring or intervene in a statutory derivative action. Such a use could be characterised as being for the purpose of communicating with a shareholder about a subject that is connected with the fact that that person holds the shares in respect of which the person is registered. It might also be characterised as being for the purpose of communicating about a subject that is connected with the exercise of rights attaching to such shares. However, it does not follow that a communication about [14.76] 751

Business and Corporate Law

the circumstances in which a person agreed to acquire shares in, or to become a member of, a company can be characterised as being connected with the fact that that person holds the shares, in respect of which the person is registered, or with the exercise of rights attaching to such shares. The use of information in the Register contemplated by IMF is to send an invitation to participate in the Proceedings, which are for the prosecution of claims against the Company and its directors bearing upon, connected with, or pertinent to, the purchase by members of shares in the Company. Such Proceedings have nothing to do with the holding of, or the exercise of rights attaching to, shares in the Company. It may be that becoming the holder of shares in the Company was an essential step in the cause of action, in that it was the parting with the price paid for the acquisition of the shares that gave rise to any loss or damage suffered by a member. It is the acquisition of shares that gave rise to the possible Claims. The shares could be sold and might already have been sold. That would have crystallised the loss or damage. That is to say, the Claims exist whether or not shares in the Company are held by a person.

Essentially, the majority of the Federal Court found against the proposed use of information from the company’s register.

Amendments to the Corporations Act and Corporations Regulations from December 2010–September 2012 on inspection of the register and “improper purpose” test [14.78] The Act deals with a number of amendments, however, those relating to s 173 and 177 are an attempt to reduce access to company registers by persons who want to use the information for an improper purpose. The purpose of the amendment was evident in the second reading speech on 29 December 2010 by Mr Bradbury MP, where he stated: this Bill will ensure that vulnerable or less sophisticated shareholders are protected from individuals or businesses that seek to profit by purchasing their shares for less than their value.

This reflects the balancing aspects of good corporate governance, such as the unfettered access to company registers with privacy and protection of those shareholders. See supplementary explanatory memorandum, p 24-25. Restrictions on the use of the information are contained within s 177(1AA) (which operates retrospectively). These restrictions which can lead to an improper purpose are illustrated in the Corporations Regulations 2001 reg 2C.1.03 to include soliciting donations, soliciting by “stockbrokers” or share brokers’ (s 923B), information regarding personal wealth, making an offer that satisfies s 1019D(1)(a) – (d) (unsolicited offers to purchase financial products off-market) and making an invitation to make an offer which satisfies s 1019D(1)(a) – (d). These are in line with the intent to protect shareholders. The Corporate Governance Institute highlighted in the Corporate Governance Guide of 2014 that further amendments to the Corporations Regulations in 2012 dealt with the anomaly in relation to off market solicitation to residents outside Australia. With the 2012 amendments it is now an “improper purpose to make an unsolicited offer to purchase financial products off market regardless of the jurisdiction in which the offer is made or received”. 752 [14.78]

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In addition, the amendment of s 173(3A) provides an application process under which the applicant must: state the purpose for which the information is sought; declare that the information is not sought for a prescribed purpose and; that the application complies with reg 2C.1.04, namely that the application contains the name and address of the applicant. It should be noted that producing an application which is false or misleading falls within the Criminal Code Act 1995 (Cth), ss 137.1 and 137.2. Combined with s 177(1AA), a person must not use or disclose information from a register if that information is to be, or is likely to be used for a prohibited purpose. Further, amendments were made to s 173(1), the “right to inspect” whereby if a register is kept on a computer then “the person inspects the register by computer”. The Supplementary Explanatory Memorandum [p 37-39] highlights the increased use of computers in record-keeping and the high cost of producing “hard copies” of company registers when most applicants would prefer “softcopies” and ultimately end up destroying any “hardcopy” produced. Resources on good governance suggest that the “softcopy” of the register should not be provided in a static format, such as PDF. Instead, consistent with reg 12.8.06, a “delimited text file” for use on a “commercially available spreadsheet or database application” should be provided on CD-ROM or a USB memory device.

Correction of registers [14.80] Application can be made to the court to correct the register where mistakes have occurred: s 175, and see McLaughlin v Daily Telegraph Newspaper Co (No 2) (1904) 1 CLR 243; Bothranch Pty Ltd v Monitronix Ltd (1989) 7 ACLC 443. SECTION 175(1)-(2) Correction of registers (1)

A company or registered scheme or a person aggrieved may apply to the Court to have a register kept by the company or scheme under this Part corrected.

(2)

If the Court orders the company or scheme to correct the register, it may also order the company or scheme to compensate a party to the application for loss or damage suffered.

Consider the following case.

[14.80] 753

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Case study Carew-Reid v The Public Trustee (1996) 14 ACLC 1106 (Supreme Court of Western Australia)

[14.85] FACTS: A shareholder wanted to sell his shares in a company. The company’s constitution gave other shareholders a right of pre-emption: see Topic 15. If none of the existing shareholders wished to purchase the shares, the directors then had power to transfer the shares to any person they selected. The directors resolved to transfer the shares to outsiders without first offering them to the other shareholders. These transfers were registered. DECISION: The Supreme Court of Western Australia held that other existing shareholders in the company had standing to apply for rectification of the register because the transfer of the shares breached their pre-emptive right under the company’s constitution. “A registration of a transfer that has been effected in breach of the pre-emption rights in the [internal rules] is void”: at 1,108.

Significance of the register of members [14.90] In the absence of evidence to the contrary, the register of members is proof of the matters contained therein: s 176. This is important in circumstances where members are either denying they are members (for example, to escape being a contributory), or asserting they are members (for example, to obtain dividends).

Role in oppression cases [14.100] Registration is often an issue in oppression actions: see ([14.480]). As a general rule, it appears that a person’s name has to be on the register for that person to be regarded as a “member” (s 231, see [14.20]) and, therefore, able to bring an action under Pt 2F.1. Normally, purchasers of shares are not “members” until the transfers are registered even though they are the beneficial owners of the shares: Niord Pty Ltd v Adelaide Petroleum NL (1990) 54 SASR 87; Leaney v Olmstead Pty Ltd (1994) 51 FCR 240; Titlow v Intercapital Group (Australia) Pty Ltd (1996) 65 FCR 449. However, in exceptional cases, registration as a member may not always be conclusive for these purposes. In Re Independent Quarries Pty Ltd (1993) 12 ACLC 159 the company had issued a share certificate in the purchaser’s name stating that the purchaser was the registered holder of the shares. The Queensland Supreme Court held that the purchaser was entitled to apply for a remedy under the predecessor of Pt 2F.1 despite its name not being shown on the register. In this case, the directors were unable to register the transfer or correct the share register because access to the share register was controlled by a rival faction in the company. In these circumstances the court was also prepared to correct the register retrospectively. In Titlow v Intercapital Group (Australia) Pty Ltd (1996) 65 FCR 449, Lehane J distinguished Independent Quarries as being a decision on “extremely unusual 754 [14.85]

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facts” (at 452) and applied the general principle that only a person whose name was entered on a company’s register was capable of bringing oppression proceedings and that the register should not be altered to include the applicant’s name. If there is doubt about whether the person aggrieved can be regarded as a “member” for the purposes of Pt 2F.1, an action for correction of the register (s 175, discussed at [14.80]) should be brought concurrently with, or before, pleading a claim under Pt 2F.1. See Titlow v Intercapital Group (Australia) Pty Ltd (1996) 65 FCR 449 at 451.

Disclosure of interests [14.110] Members of companies may hold shares as trustees in order to obtain tax benefits or to conceal the true identity of the beneficial owner. Under s 1072H, transferees of unlisted companies who are not the beneficial owners of the shares must notify the company that the shares are held non-beneficially. Unlisted companies must then note this fact on their register of members: s 169(5A). Trustees of shares in a proprietary company who hold the shares on behalf of another company must notify the company within one month of commencing to hold the shares: s 1072E(11). A failure to do so is an offence of 10 penalty units. Trustees who hold shares in other situations – that is, on behalf of individuals or companies other than in proprietary companies – may request the company to show their holding on the register as being on trust: s 1072E(9). Listed public companies, the responsible entity of a listed managed investment scheme (see Chapter 22 (Yogaratnam)) and ASIC may obtain information about the “true” ownership of shares in the company or interests in the scheme under Pt 6C.2. This is to complement the Corporations Act requirement to disclose substantial shareholdings: see [14.120]. Any member of the company or scheme may request ASIC to exercise this power to obtain information and, unless it would be unreasonable, ASIC must comply with the request: s 672A(2).

Substantial shareholders [14.120] A person who acquires or ceases to have a substantial holding in: • a company listed on any prescribed financial market such as the Australian securities exchange; or • a listed registered (Yogaratnam));

managed

investment

scheme

(see

Chapter

22

must disclose the detailed information prescribed by the Corporations Act to: • the company; • the responsible entity of the scheme (in the case of a managed investment scheme); and [14.120] 755

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• the relevant market operator [eg, the ASX] within two business days after he or she becomes aware of the information or by 9.30 am on the next trading day of the relevant financial market if there is a takeover bid: s 671B. A person has a “substantial holding” if that person or their associates (as defined by s 9) is entitled to (the technical term is “has a relevant interest in”: see Chapter 23 (Yogaratnam)) more than 5% of the total number of votes attached to voting shares: s 9. A person must also give full particulars of any change that is greater than 1% (whether it is an increase or a decrease) in a substantial holding or if that person makes a takeover bid: s 671B and Chapter 23 (Yogaratnam). These provisions are intended to ensure that companies are informed about the identity of large shareholders and the extent of and movements in their holdings. This information may give the company the first indication of a possible takeover bid. Another reason is that directors and shareholders can find out who has sufficient voting power to influence decisions made by the company, especially power to block a special resolution.

Transfer of shares [14.130] Under s 1070A (see [14.40]), shares are transferable in the manner provided by the constitution or, if the company is a listed company, the ASX Listing Rules or operating rules of a prescribed CS facility. If the company has not adopted a constitution, the following replaceable rules will be relevant: • ss 1072A, 1072B, 1072D – transmission of shares on death, bankruptcy or mental incapacity; • s 1072F – registration of transfers; and • s 1072G – additional discretion for directors of proprietary companies to refuse to register a transfer of shares: see [14.180].

Unlisted shares [14.140] Section 1071B deals with shares that are not listed on the ASX or a prescribed CS facility. Before a transfer of (unlisted) shares can be registered by the company, a proper instrument of transfer must be delivered to it: s 1071B(2). This requirement is to ensure that stamp duty is paid on the transfer. The rate at which stamp duty is levied is determined by the State or Territory in which the company was registered. For example in South Australia the transfer, either by way of sale or gift, of shares in a company that is not quoted on a recognised stock exchange is subject to stamp duty on the market value of the shares or consideration, whichever is greater. The rate of stamp duty charged is $0.60 cents per $100 or part of $100. See http://www.revenuesa.sa.gov.au/ taxes-and-duties/stamp-duties/calculators/stamp-duty-on-share-transfers. 756 [14.130]

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A contract for the sale of shares is like a contract for the sale of land. It is not completed until certain documents are exchanged and the transactions registered. With land, the new proprietor’s name must be entered on the Register of Titles. With shares, the new member’s name must be entered on the company’s register: s 1072F(1). This occurs after the transfer and share certificate have been lodged, any fees payable on registration have been paid and the directors have been given any further information they required to establish the right of the person to make the transfer. Once the transfer has been registered, the (unlisted) company will issue a share certificate to the transferee.

Listed shares [14.150] If the company is listed on an Australian stock exchange, a simplified procedure for the transfer of shares is available under s 1075A and Ch 8 of the ASX Listing Rules. (It is common for the conveyance of marketable securities quoted on a recognised stock exchange to be exempt from stamp duty.) In essence, the system relies on “brokers” (see Topic 16) guaranteeing the good title of the transferor. If a transfer is made through a broker, a flat fee or commission will be charged. The rates vary depending on the advice or services provided by the broker, ranging from about $10 for a small transaction (through an internet or telephone broker which does not provide advice) to commission of between 1% and 2.5% for traditional brokers who provide advice to investors.

ASX Trade [14.160] “ASX Trade” is an electronic screen-based trading system which enables each broker to trade in the quiet of her or his own office using a computer terminal. Orders are entered into the “ASX Trade” system and transmitted to the market via the ASX’s host computer. Other brokers can then see via their terminals and respond. Orders are executed on a price and time priority basis. Suppose a client wishes to buy 1,000 BHP Billiton shares. The broker will check BHP Billiton on the screen and note the quoted selling offer is, say, $31.00 and the buying bid, $30.98. Alongside each bid is a number which identifies each broker. The client’s broker could complete a trade by offering to buy at $31.00 and the details of the sale would be automatically recorded. If the offer is only $30.99, however, that offer replaces the one at $30.98. A seller might be prepared to sell at that price and if so, that bid replaces the $31.00 and the sale is completed. If more than one buyer or seller quotes the same price, priority goes to the earliest bid. Buyers and sellers are free to make offers at any price with all bids shown in the respective buy and sell queues in ascending and descending order respectively.

CHESS [14.170] “CHESS” is the acronym for Clearing House Electronic Subregister System. CHESS is an electronic settlement and transfer system used by brokers [14.170] 757

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and other institutional investors. It has two major functions: to facilitate the settlement and clearing of trades in shares and to provide an electronic subregister for shares in ASX listed companies. All holdings and transfers of shares in listed companies are recorded electronically. This system provides electronic transfer of securities within the time frame of T+3 (third business day after trade date) and guarantees payment and delivery. The T+3 settlement timeframe is the norm for most major securities markets worldwide. Instead of share certificates, shareholders in a listed company receive a “holding statement” (similar to a bank statement) when there is any change in their shareholding in the company. Each shareholder is issued either: • a “Security Holder Reference Number” (SRN); or • a “Holder Identification Number” (HIN), as verification of ownership of their shares. This number resembles a PIN and must be quoted whenever a shareholder buys or sells shares or other securities in the company. A SRN is issued by the company issuing the securities and is generally used by people who own securities in relatively few companies. An HIN is more convenient for people who own securities in a large number of companies or who actively trade in them. If a holder of securities enters into an arrangement with a broker or financial adviser for their securities to be held on the broker or financial adviser’s own electronic subregister, the holder is issued with an HIN covering all that person’s holdings. Investors should protect their HIN or SRN in the same way as they protect a PIN for a credit or ATM card. The strict compliance rules that brokers must follow when dealing with new clients are an additional protection against fraud. If an investor suffers loss because of a fraudulent transfer of securities he or she may be able make a claim against the National Guarantee Fund operated by the ASX.

Restrictions on the transfer of shares Refusal to register [14.180] Although shares are personal property and as such are transferable by the shareholder (s 1070A(1), see [14.40]), a company’s internal rules may give directors the right to refuse to register a transfer of shares: for example, see the replaceable rules in ss 1072F – 1072G. Any discretion to refuse registration must be exercised in good faith for the benefit of the company, and not for any other purpose: Re Smith & Fawcett Ltd [1942] Ch 304; see ([13.880]). Under s 1071F, anyone refused registration may apply to the court and if the court believes the directors have refused or failed to register “without just cause”, the court can make an order as it sees fit, as in the following illustration.

758 [14.180]

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Case study Waters v Winmardun Pty Ltd (1990) 9 ACLC 238 (Supreme Court of Victoria)

[14.185] FACTS: A shareholder in a family company executed a deed of arrangement assigning all his property, including his shares in the company, to his trustee in bankruptcy. The company’s internal rules gave the directors an absolute discretion to refuse to register any transfer of shares. The directors (who were the shareholder’s parents) refused to register the transmission of the shares to the trustee. DECISION: The Court held that the directors’ refusal to register the transmission was without just cause and ordered them to register the transfer.

If the internal rules do not require the directors to give their reasons, it is often very difficult for a plaintiff to prove “without just cause”. Arguably, the directors are merely exercising their discretion. Nevertheless, if a reason can be discovered on the facts, s 1071F overrides the discretion and allows for judicial scrutiny. In Roberts v Coussens (1991) 25 NSWLR 171, although the constitution gave the directors an absolute discretion, the court found that the refusal to register was based purely on a desire to choose a compatible co-shareholder and this was held not to be just cause. Compare Ashton Millson Investments Ltd v Colonial Ltd (2001) 162 FLR 145 where the directors’ refusal to register a transfer of less than a marketable parcel of shares in a listed public company was made in compliance with the company’s constitution and the relevant stock exchange rules, and was held to be for just cause. Directors should not delay in considering whether to refuse registration or not. Under s 1071E, a company which refuses registration is required to send notice of the refusal to the transferee within two months of the date on which the transfer was lodged. Breach of this provision is an offence of 10 penalty units and may, under general law, also result in the company losing the right to deny registration. In Re Swaledale Cleaners Ltd [1968] 1 WLR 1710, the constitution gave the directors a discretion to refuse registration. The Court of Appeal held that the directors must exercise their discretion within a reasonable time and, if it was not so exercised, the right to deny registration lapsed.

Winding up situations [14.190] Generally, any transfer of shares must be made before the commencement of winding up. Where winding up is by court order, any purported transfer after winding up commences is void (s 468(1)), although the transfer can be validated by the court: s 468(3). Where the winding up is voluntary, any transfer of shares is void unless it is made with the sanction of the liquidator or the court: s 493A.

[14.190] 759

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MEMBERS' RIGHTS AND REMEDIES Principles Introduction [14.200] This Topic discusses the nature and purpose of the rights and remedies available to members to challenge decisions or actions taken by the company. The object of members’ remedies is to protect members (principally, minority members) from abuse at the hands of the controllers of the company, whether they be the directors or controlling (majority) members of the company. The potential for abuse arises because the board of directors is in control of the management of the company and the majority members are in control of the general meeting of the company. Risks arise from giving management control to the board of directors: see Topic 13. Majority members have control of the general meeting through their voting power. Minority members are vulnerable to the actions of both groups of controllers whenever the interests of the controllers and the minority members diverge. Every member of a company has a set of rights by virtue of her or his membership. These include rights conferred by both the general law (common law and law of equity) and the Corporations Act 2001 (Cth) (Corporations Act): • the general law (common law and equitable rights): for example, the general law provides members with the right to vote at general meetings unless the company’s internal rules remove that right (Pender v Lushington (1877) 6 Ch D 70 at 81); • the company’s internal rules: the contract between the company and its members and between the members themselves that is formed by the company’s internal rules can also confer rights on members: s 140(1) • statutory derivative action: Pt 2F.1A of the Corporations Act provides members with the right to an action on behalf of the company where the company is unwilling or unable to do so (s 236) and leave of the court is granted under s 237; • oppression remedy: s 232 of the Corporations Act provides members with the right to an action where the conduct complained of is unfairly prejudicial or unfairly discriminatory against a member or class of members; and • other Corporations Act provisions: for example, the Act provides members with the right to request the directors to convene a general meeting of the company (s 249D) and to demand a poll (s 250L).

760 [14.200]

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Figure 14.1: Members’ legal rights and remedies

Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act) Chapter 4 Part 4–4—Protection of members’ interest of the CATSI Act; related provisions in Chapter 8—Civil consequences of contravening civil penalty provisions; Part 10–5—Protection for whistleblowers; Chapter 13—Offences; and Chapter 14—Courts and Proceedings; Division 576–25—Injunctions of the CATSI Act. Recent decisions in relation to breach of directors’ duties highlight that courts are willing to award substantial amount compensation and high fines for breach of such duties.

[14.205] Both the general law and the Corporations Act permit members to bring legal proceedings for the purposes of: • challenging a company’s actions or decisions before the court; and • obtaining remedies against the company and/or the officers responsible for those actions or decisions.

Terminology for remedies and members' rights [14.210] An understanding of the terminology used in connection with members’ legal actions is essential. These terms include personal actions, derivative actions, representative actions, statutory actions and class actions. Each term has a distinct and, at times, confusing meaning. The following table gives a summary definition of the terms. You will become more familiar with them as you read through this Topic.

TABLE 14.1: Key terms – members' rights and remedies Term Personal actions

Meaning Actions taken by members where the breach affects a member's personal rights

Comment Term used in connection with both general law and statutory remedies for members [14.210] 761

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Term Representative actions

Derivative actions

Derivative and personal actions together Members’ statutory remedies

Class actions

Meaning Actions where one member sues on behalf of other members to enforce a personal right which all members enjoy in order to save time and litigation costs A member or group of members brings an action on behalf of the company for a wrong done to the company. The company becomes a defendant to the action

Comment As above. Provided for by rules of court

A joint action can occur if the action or decision gives rise to both personal and derivative (ie, company) rights Remedies in Pts 2F.1 and 2F.2, ss 461(1), 1322 and 1324

Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] 1 All ER 354

Where seven or more joint applicants bring an action together against a common defendant

• See Pt 2F.1A • The members bring the action because the wrongdoers are in control of the company and the company does not sue

No issue of standing provided that the plaintiff meets the requirements of the sections in the Corporations Act, eg is a member The case must arise out of related circumstances as provided for in State and Federal Rules of Court

Personal rights and remedies Personal rights conferred by general law [14.220] The general law provides a range of methods by which members can challenge company decisions or actions detrimental to their interests. These include: • the right to challenge a fraud on the minority; • the right to have her or his voting rights protected against improper actions by the directors which would dilute or otherwise harm those rights (Residues Treatment & Trading Co Ltd v Southern Resources Ltd (No 4) (1988) 51 SASR 177); • the right to sue directors for breach of their fiduciary duties in the special fact situations (see Chapter 9 (Yogaratnam)) where the courts have found that directors owed duties to particular shareholders not just to the company; and • the right to challenge modifications of the company’s internal rules which expropriate valuable proprietary rights attaching to shares: Gambotto v WCP Ltd (1995) 182 CLR 432.

Fraud on the minority Definition [14.230] Fraud on the minority is one of the grounds on which members are permitted by the general law to bring a personal action. “Fraud”, in this 762 [14.220]

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context, does not mean deceit, but rather abuse of power, whereby the majority members use their voting power to secure an unfair gain at the expense of the minority. The defrauders must be in effective control of the company. The doctrine of fraud on the minority derives from equitable principles. It operates to place a limit on the power of majority members in general meetings. It requires majority members to exercise their voting rights for proper purposes – namely, the range of purposes for which the power to vote was conferred at the time the company was formed. If the majority members use their votes for a purpose outside this range, the minority members are able to challenge the legality of the majority’s vote as a “fraud on the minority”.

Majority members are not fiduciaries [14.240] Despite the restrictions imposed by the doctrine of fraud on the minority, majority members do not owe any fiduciary duties or duty of care to the company or to the minority members of a company. Majority members are not in the same position as directors. Directors are in a fiduciary relationship with the company and are supposed to consider the company’s interests, not their own: see Chapter 9 (Yogaratnam). Members, on the other hand, have long been considered in Australian law as free to vote in their own interests at general meetings (Peters’ American Delicacy Co Ltd v Heath (1939) 61 CLR 457), subject to the limitations imposed by the doctrine of fraud on the minority. The duties (if any) of the majority members in general meeting, apart from the limitation imposed by the doctrine of fraud on the minority, remain uncertain. A more recent case suggests that a fiduciary relationship can arise between members but only in special circumstances: see Brunninghausen v Glavanics (1999) 46 NSWLR 538.

Examples of fraud on the minority [14.250] The operation of the fraud on the minority exception is best understood by way of examples. The following are examples of situations where the fraud on the minority exception has arisen, but these are not closed categories. Fraud on the minority includes situations where the majority votes to: • ratify a breach of directors’ duties by the present (or former) directors; • expropriate property belonging to the company for themselves; • expropriate the shares or rights attaching to shares held by minority members; and • modify the company’s internal rules. The complaints made in these situations may also entitle a member to bring a derivative action under s 236 and/or an oppression claim under s 232. [14.250] 763

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Improper ratification of directors' breach of duty [14.260] Where directors breach their duty to the company, the general meeting may exonerate them but there are limits to this power. In particular, it seems that where the breach of duty involves directors using their powers for an improper purpose, the majority wishing to ratify what the directors have done must be careful not to commit a fraud on the minority: see Ngurli Ltd v McCann (1953) 90 CLR 425; Bamford v Bamford [1970] Ch 212; Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666; and Residues Treatment & Trading Co Ltd v Southern Resources Ltd (No 4) (1988) 51 SASR 177. The decision in Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666, and later in Residues Treatment & Trading Co Ltd v Southern Resources Ltd (No 4) (1988) 51 SASR 177, indicate that the general meeting cannot approve a breach of duty by directors, where the approval itself is not given in good faith for the benefit of the company as a whole. The worst example is a situation where the majority uses their voting power to excuse a breach of duty in which they were personally involved as directors of the company. Can the general meeting excuse a director’s negligence? In Pavlides v Jensen [1956] Ch 565 the court said it could where there was no fraud or ultra vires action. But in Daniels v Daniels [1978] 2 WLR 73 the court held that where the directors made unfair profits at the company’s expense, they could not be excused.

Expropriation of the company's property [14.270] In Menier v Hooper’s Telegraph Works (1874) 9 Ch App 350, the majority members resolved to wind up the company and transfer the assets to another company which they controlled. The court held the majority could not divide up the property for themselves and exclude the minority. Directors cannot ratify their own expropriation of company property. In Cook v Deeks [1916] 1 AC 554 the court held that the contract negotiated by the directors belonged to the company, and the directors could not divert the contract and the benefit of it to themselves, even though they controlled the general meeting. Similarly, in Parke v Daily News Ltd [1962] Ch 927 the general meeting was unable to ratify the directors’ decision to make gratuitous payments to employees. The money belonged to the company, that is, the shareholders, and could not be given to employees.

Expropriation of members' property [14.280] It may be a fraud on the minority for the majority members to use their voting power so as to deprive members of their shares, or “valuable proprietary rights attaching to those shares” (such as the power to vote) – see the discussion in Gambotto v WCP Ltd (1995) 182 CLR 432, at [14.290] below. It is interesting to note that, under some express provisions of the Corporations Act, companies can compulsorily acquire minority shareholdings and these procedures are not affected by the principles in Gambotto. Chapter 6A 764 [14.260]

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now allows for compulsory acquisitions both after a takeover bid and generally where a person holds 90% or more of the shares. Section 256B provides for selective capital reductions which can be used to eliminate minority shareholders: see Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2000) 18 ACLC 665 (affirmed on appeal Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2001) 166 FLR 144). Another option that can be used to eliminate minority shareholders is a scheme of arrangement under s 414, for which court approval is required: see Re NRMA Ltd (No 1) (2000) 156 FLR 349).

Modifying the company's internal rules Relevant law

[14.290] From time to time, a company may wish to modify its internal rules. For such modifications to be legally effective, they must comply with the statutory requirements discussed in Topic 11. However, a majority vote may comply literally with these requirements, yet still be invalid because it amounts to a fraud on the minority. Case study Gambotto v WCP Ltd (1995) 182 CLR 432 (High Court of Australia)

[14.295] FACTS: Almost all (99.7%) of the almost 17 million shares in WCP Ltd (WCP) were held by wholly owned subsidiaries of Industrial Equity Limited (IEL). Mr Gambotto held 15,898 of the remaining 50,590 shares. WCP called a general meeting to amend its internal rules by inserting a provision allowing any member entitled to more than 90% of its shares to acquire all the remaining shares for $1.80 per share. The shares were valued at $1.36 per share. IEL wanted WCP to become a wholly owned subsidiary so that it could take advantage of WCP’s accumulated tax losses and also save a considerable amount in administrative costs. The minority shareholders who attended the general meeting voted unanimously in favour of the proposed amendment. However, Mr Gambotto did not attend the meeting and challenged the validity of this amendment, on the ground that the majority was attempting indirectly to expropriate his shares (see discussion above). DECISION: All members of the High Court held that the proposed modification was invalid, even though it complied with the normal statutory requirements. The modification would “allow an expropriation by the majority of the shares, or of valuable proprietary rights attaching to the shares of a minority” and as such would only be valid if it was carried out for a proper purpose and did not operate oppressively towards the minority: at 444-445 per Mason CJ, Brennan, Deane and Dawson JJ. The fact that the alteration would “advance the interests of the company as a legal and commercial entity” by providing, for example, tax benefits and administrative savings, was not a sufficient justification because it did not “attach sufficient weight to the proprietary nature of a share”: at 446. The onus of proving that the test had been satisfied was on the majority and it had not been discharged. The High Court laid down new tests which must be satisfied before the proposed [14.295] 765

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modification will be valid. The tests, discussed below, depend on the nature of the modification being made. Modifications involving an expropriation of shares

[14.300] The High Court in Gambotto v WCP Ltd (1995) 182 CLR 432 held that, where the modification to the internal rules would allow the majority members to expropriate the minority’s shares or valuable rights (such as the right to vote) attaching to those shares, the modification must: • comply with the requirements in the Corporations Act; • be for a proper purpose; and • not operate oppressively – that is, unfairly in relation to minority members. The majority members have the onus of proving that this test has been satisfied. In other words, the majority has a duty to ensure that any modifications of a company’s internal rules which would permit expropriation of shares or share rights are for a proper purpose and not oppressive towards the minority. The High Court held that the proposed modification did not satisfy these tests. The majority judges held that the modification was not for a proper purpose. It would only be for a proper purpose if it could be shown to save the company from a significant detriment or harm. The minority (McHugh J) held that the proposed alteration was oppressive because the majority had not made full disclosure of all material matters which might affect a member’s vote on the proposed modification. Modifications giving rise to conflicts between members

[14.310] Where the modification to the internal rules involves some conflict of interest between majority and minority members (apart from the expropriation of member rights), the modification will be valid if it: • complies with the requirements in the Corporations Act; and • is not oppressive or beyond any purpose contemplated by the company’s constitution. Other modifications

[14.320] A modification which does not give rise to any conflict between majority and minority members will be valid if it: • complies with the requirements in the Corporations Act; and • is bona fide, in the interests of the company as a whole: Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656.

766 [14.300]

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Personal rights and remedies under statute Outline [14.330] The Corporations Act provides members with a broad range of specific statutory rights and remedies which are commonly referred to as “personal statutory rights” that can be used by members seeking to enforce their rights against the company. They are considered to be personal rights because it is the member’s inherent interest in the company as a shareholder which gives rise to the remedy.

Personal rights conferred by statute [14.340] The Corporations Act gives members a wide range of specific statutory rights and remedies. These include: • the right to inspect the company’s books (s 247A); • the right to apply to the court for an order to correct a company register (s 175); • the right to challenge decisions by the majority which affect members’ special rights (s 246D); • the right to seek an injunction against a breach of the Corporations Act under s 1324; • the right to seek a remedy for oppression under Pt 2F.1; and • the right to apply for a winding up order under s 461(1). Right to inspect books

[14.350] It is sometimes helpful to members seeking a remedy for perceived injustice to be able to inspect the company’s books. Under s 247A, members can apply to the court for permission to inspect. This is a remedial provision and before exercising its discretion to allow inspection under s 247A, an applicant must satisfy the court that the application is made in good faith and for a proper purpose (not, for example, to obtain information to assist a takeover bid): see Unity APA Ltd v Humes Ltd (No 2) [1987] VR 474; Cescastle Pty Ltd v Renak Holdings Ltd (1991) 9 ACLC 1333; and Czerwinski v Syrena Royal Pty Ltd (No 1) (2000) 18 ACLC 337. Some recent cases indicate that courts may now be adopting a more liberal approach when considering these applications: see Keenfern Pty Ltd v Thorlock International Ltd (2002) 20 ACLC 1,322; Caveat Pty Ltd v Baillie (2002) 21 ACLC 42; Acehill Investments Pty Ltd v Incitec Ltd [2002] SASC 344; and United Rural Enterprises Pty Ltd v Lopmand Pty Ltd (2003) 47 ACSR 514. However, this broader approach has now been rejected by the Western Australian Full Court in Majestic Resources NL v Caveat Pty Ltd [2004] WASCA 201.

[14.350] 767

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Smartec Capital Pty Ltd v Centro Properties Ltd [14.355] Smartec Capital Pty Ltd v Centro Properties Ltd [2011] NSWSC 495 (Supreme Court of New South Wales) Facts: In Smartec Capital Pty Ltd v Centro Properties Ltd [2011] NSWSC 495, Centro (Centro property group, Centro (EPL) Ltd and CPT Manager Ltd) made a number of announcements in relation to a proposed restructure. Smartec had a 0.4854% holding in the company. This ranked them the 14 th biggest holder in the top 20. Smartec had concerns regarding the restructure. Smartec made application to the court for an order under s 247A(1). It sought access to all documents which “stand behind the … announcement and the aspects and details of its subject matter which have been referred to in later announcements and correspondence” at [6]. Decision: The court heard arguments as to the circumstances when good faith and proper purpose had been found and conversely not found. His Honour, Barrett J agreed with counsel for Smartec that the words ″in good faith and for a proper purpose are not confined by reference to some cause of action or legal wrong and are, on their face, at large″, citing Bryson AJ in Rowland v Meudon Pty Ltd [2008] NSWSC 381 at [35]. However, his Honour was concerned that Smartec were requesting access to documents which Centro had not lodged with the ASX or determined that they were to be disclosed to security holders. There were some 30,000 security holders, of which Smartec is only one. His Honour found that an order for inspection under s 247A(1) must be in cognisant of the disclosures already made to the ASX and security holders and that further disclosures must be in view of the effect they may have on the price or value of securities. In addition, his Honour previously stated in Praetorin Pty Ltd v TZ Ltd [2009] NSWSC 1237 at [76] that: in the case of an ASX listed entity with the expectation of the maintenance of an informed market and investor body is strongly underwritten by the continuous disclosure regime actively administered by ASX with statutory reports. The need for one investor to have access to company documents to the exclusion of all other investors is likely to be very greatly reduced by the existence of that regime at [69], [76]. His Honour determined that Smartec should be allowed access to inspect the “books”, consisting of correspondence between it and the ASX, with such access being determined by the court to ensure the maintenance of confidentiality at [83]. As to the five other groups of documents requested, his Honour found that there was “no proper purpose” demonstrated with those concerns at [84]–[90]. Correction of the register

[14.360] Under s 175, “a person aggrieved” can apply to the court for an order to correct a register kept by the company. This would include a member applying to correct the register of members where an error has been made. Note also s 1071F, which applies where someone has been refused registration. This may be an important first step towards attaining “member” status and, 768 [14.355]

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therefore, standing under Pt 2F.1. In Trafalgar West Investments Pty Ltd v Superior Lawns Australia Pty Ltd [2012] WASC 460 (S), the court pursuant to s 1071F ordered the defendant to register the two share transfers, copies of which are annexed to an affidavit. Variation of rights

[14.370] Where the special rights of members (such as dividend rights) have been altered, 10% or more of the members, who did not vote in favour of the variation, may apply to the court to have the decision overturned: s 246D. The application can be made even though the proper procedure for variation has been followed.

Personal rights conferred by the statutory contract [14.380] A company’s internal rules are a contract between the company and its members and between the members themselves: s 140(1), and see Topic 10. In Hickman v Kent or Romney Marsh Sheep-breeders Association [1915] 1 Ch 881 a member was able to enforce the statutory contract created by the company’s internal rules under the statutory forerunner to s 140. If the majority breaches a provision of the internal rules which confers personal rights on members, the majority can be restrained: see also Pender v Lushington (1877) 6 Ch D 70; and Bailey v New South Wales Medical Defence Union Ltd (1995) 184 CLR 399. The difficulty is to decide whether a breach of the internal rules is either: • an internal irregularity capable of being ratified by the general meeting; or • a serious infringement of a personal right. In deciding these cases, the courts seem to be looking to see whether ratification by the general meeting has taken place, but ratification does not of itself destroy a member’s claim. The question then becomes whether the individual’s right should prevail over the wishes of the majority. Australian courts have tended to interpret personal rights broadly: see Bailey v New South Wales Medical Defence Union Ltd (1995) 184 CLR 399.

Enforcement of personal rights: Foss v Harbottle [14.390] The rule in Foss v Harbottle (1843) 2 Hare 461; 67 ER 189 provided for two key developments to the law on members’ remedies. First, Foss v Harbottle provided that the proper plaintiff in an action involving a wrong committed against the company was the company itself and not any of its members. The consequence of the “proper plaintiff rule” was significant because it provided that the company, and not the member, had the right to commence legal action to rectify any alleged wrong that had been committed against the company. Secondly, Foss v Harbottle provided that the alleged wrong can be ratified by a simple majority of members by way of resolution as provided by the company’s constitution. The second rule has often been referred to as the “internal management rule” and reflects the rights of members to enforce their personal rights, including the right to ratify breaches as provided by the [14.390] 769

Business and Corporate Law

constitution. Since the internal management rule allowed majority members to rectify company breaches, the rights of minority members could be prejudiced if left unchecked. A number of exemptions to the second limb of the Foss v Harbottle rule were later developed by the courts to protect the rights of minority members. As has been discussed above, minority members were provided with various general law rights and remedies. Members’ ability to enforce company breaches is now largely contained in the statutory derivative action under Pt 2F.1A of the Corporations Act. The right at general law for a member to bring, or commence an action in, proceedings on behalf of the company has now been abolished: s 236(3).

General statutory rights and remedies [14.400] In addition to statutory personal rights which can be used by members seeking to enforce their rights against the company, members also have available a number of general statutory rights and remedies which are granted by the Corporations Act. These general statutory rights include: • derivative action (ss 236 and 237); • oppression remedy (ss 232 – 235); • injunction (s 1324); • procedural irregularities (s 1322); and • winding up order (ss 461 and 462). Members may also choose to participate in legal proceedings against the company in the form of a class action under s 50 of the Australian Securities and Investments Commission Act 2001 (Cth) which mitigates the potential for loss and for costs to be awarded against any individual member.

Derivative action [14.410] A member has a general statutory right to bring proceedings on behalf of a company or to intervene in proceedings to which the company is a party: s 236. The proceedings must be brought in the company’s name, even though it is a member and not the company who brings them: s 236(2). Prior to the introduction of ss 236 and 237 of the Corporations Act members had a right to bring a derivative action under the common law and equity. That common law and equitable right has now been abolished by s 236(3): see Karam v Australia & New Zealand Banking Group Ltd (2000) 18 ACLC 590; and Chapman v E-Sports Club Worldwide Ltd (2001) 19 ACLC 213. The Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 (Cth) (the originating Bill for the Corporate Law Economic Reform Program Act 1999 (Cth) (CLERP Act)) stated at [6.23] that the abolition of the general law (common law and equitable) rights was necessary to “promote certainty regarding the nature of the action and avoid confusion between any diverging principles relating to the statutory action and the common law action”. There is some doubt as to whether Pt 2F.1A operates retrospectively to abolish causes of action arising 770 [14.400]

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under the general law before the CLERP Act commenced on 13 March 2000. In Karam v Australia & New Zealand Banking Group Ltd (2000) 18 ACLC 590 at [31], Santow J said that the issue was not free from doubt but he believed that the better view is that Pt 2F.1A applies retrospectively because it is a procedural provision: see also Advent Investors Pty Ltd v Goldhirsch (2001) 19 ACLC 580; Chapman v E-Sports Club Worldwide Ltd (2001) 19 ACLC 213; and Brightwell v RFB Holdings Pty Ltd (in liq) (2003) 171 FLR 464. However, there may be an exception in circumstances where legal proceedings under the general law rules had actually begun before Pt 2F.1A commenced and displacing those proceedings would deprive the plaintiffs of substantive rights: see Shum Yip Properties Development Ltd v Chatswood Investment & Development Co Pty Ltd (2002) 166 FLR 451; and Brightwell v RFB Holdings Pty Ltd (in liq) (2003) 171 FLR 464 at [40] per Austin J. With the passage of time, it can be expected that situations involving these issues will occur less frequently. SECTION 236 Bringing, or intervening in, proceedings on behalf of a company (1)

A person may bring proceedings on behalf of a company, or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for those proceedings, or for a particular step in those proceedings (for example, compromising or settling them), if: (a)

(b)

the person is: (i)

a member, former member, or person entitled to be registered as a member, of the company or of a related body corporate; or

(ii)

an officer or former officer of the company; and

the person is acting with leave granted under section 237.

(2)

Proceedings brought on behalf of a company must be brought in the company’s name.

(3)

The right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished.

Note 1: For the right to inspect company books, see subs 247A(3) to (6). Note 2: For the requirements to disclose proceedings and leave applications in the annual directors’ report, see subs 300(14) and (15). Note 3: This section does not prevent a person bringing, or intervening in, proceedings on their own behalf in respect of a personal right.

It is important to appreciate that an action under s 236 must be concerned with correcting a wrong done to the company. If a member wishes to challenge a wrong done to herself or himself, he or she must bring a personal action.

[14.410] 771

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Who can bring derivative proceedings? [14.420] Proceedings under s 236 can be brought by: • members (including those who are not actually on the register of members, but who are entitled to be registered) and former members of the company or a related company; and • directors or officers (present and former) of the company: see Isak Constructions (Aust) Pty Ltd v Faress (2003) 47 ACSR 224. It now appears settled that the fact that a company is being wound up will not prevent proceedings being brought under s 236: Brightwell v RFB Holdings Pty Ltd (in liq) (2003) 171 FLR 464; Charlton v Baber (2003) 47 ACSR 31; and Carpenter v Pioneer Park Pty Ltd (in liq) (2004) 51 ACSR 245. The proceedings covered by s 236 include causes of action that the company has against either: • a director, for breach of duties owed to the company; or • a third party, for a breach of a contract or for a tort committed by that third party. Note: Creditors are not able to bring proceedings.

Leave of the court required [14.430] Before commencing or intervening in proceedings in the name of, and on behalf of, a company, a person must apply for leave from the court under s 237: Karam v Australia & New Zealand Banking Group Ltd (2000) 18 ACLC 590; and Chapman v E-Sports Club Worldwide Ltd (2001) 19 ACLC 213. The court must grant leave if all the grounds in s 237(2) are satisfied: RTP Holdings Pty Ltd v Roberts (2000) 36 ACSR 170; Goozee v Graphic World Group Holdings Pty Ltd (2002) 170 FLR 451; and Charlton v Baber (2003) 47 ACSR 31. Note s 237(1) – (3): SECTION 237(1)-(3) Applying for and granting leave (1)

A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings.

(2)

The court must grant the application if it is satisfied that:

772 [14.420]

(a)

it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and

(b)

the applicant is acting in good faith; and

(c)

it is in the best interests of the company that the applicant be granted leave; and

(d)

if the applicant is applying for leave to bring proceedings – there is a serious question to be tried; and

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Remedies for Members

(e)

(3)

either: (i)

at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or

(ii)

it is appropriate to grant leave even though subparagraph (i) is not satisfied.

A rebuttable presumption that granting leave is not in the best interests of the company arises if it is established that: (a)

(b)

(c)

the proceedings are (i)

by the company against a third party; or

(ii)

by a third party against the company; and

the company has decided: (i)

not to bring the proceedings; or

(ii)

not to defend the proceedings; or

(iii)

to discontinue, settle proceedings; and

or

compromise

the

all of the directors who participated in that decision: (i)

acted in good faith for a proper purpose; and

(ii)

did not have a material personal interest in the decision; and

(iii)

informed themselves about the subject matter of the decision to the extent they reasonably believed to be appropriate; and

(iv)

rationally believed that the decision was in the best interests of the company.

The director’s belief that the decision was in the best interests of the company is a rational one unless the belief is one that no reasonable person in their position would hold.

These criteria are designed to prevent members from being able to bring actions on the company’s behalf when it would be detrimental to the company and as the Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 (Cth) states at [6.33]: to strike a balance between the need to provide a real avenue for applicants to seek redress on behalf of a company where it fails to do so and the need to prevent actions proceeding which have little likelihood of success.

Compare cases such as, Karam v Australia & New Zealand Banking Group Ltd (2000) 18 ACLC 590; RTP Holdings Pty Ltd v Roberts (2000) 36 ACSR 170; Keyrate [14.430] 773

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Pty Ltd v Hamarc Pty Ltd (2001) 38 ACSR 396; Metyor Inc v Queensland Electronic Switching Pty Ltd [2003] 1 Qd R 186; Isak Constructions (Aust) Pty Ltd v Faress (2003) 47 ACSR 224; and Charlton v Baber (2003) 47 ACSR 31, where leave was granted with Chapman v E-Sports Club Worldwide Ltd (2001) 19 ACLC 213; Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313; Goozee v Graphic World Group Holdings Pty Ltd (2002) 170 FLR 451; and Cannon Street Pty Ltd v Karedis [2004] QSC 104, where leave was refused. These last three cases indicate that while an applicant may find it relatively easy to convince a court that there is a serious question to be tried (s 237(2)(d)), it may be more difficult for an applicant to convince the court that he or she is acting in good faith and that granting leave will be in the best interests of the company: s 237(2)(b), (c). In both Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313 and Goozee v Graphic World Group Holdings Pty Ltd (2002) 170 FLR 451, the court refused leave on the grounds that the applicants were acting for a collateral purpose which amounted to an abuse of process: see the detailed discussion of this point by Barrett J in Charlton v Baber (2003) 47 ACSR 31 at [40]-[44]. More recently, Ragless v IPA Holdings Pty Ltd [2012] SASC 203 restated the position (perhaps with further clarity) in Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313, that the benefit in seeking leave under s 237 must be as a person with standing under s 236(1)(a), rather than a benefit in another capacity which may result in “a double recovery”. Such a position would strike at one of the five criteria, namely, good faith at [43], [44]. Personal animosity is not of itself a decisive factor at [55]. In Pottie v Dunkley [2011] NSWSC 166 it was affirmed that that the court does not have discretion once the five criteria have been met. Instead, leave must be granted when the criteria is satisfied at [36]. In this case, delay in bringing the action was not deemed to affect the determination of good faith. Delay was attributed to the death of the plaintiff’s father at [57], [88].

“Best interests” of the company [14.435] In Re Gladstone Pacific Nickel Ltd [2011] NSWSC 1235, considerations to satisfy the requirement that the action be in the “best interests of the company” were said to be twofold, firstly that it is in the best interests of the company that the action be brought and secondly that the best interests of the company are satisfied if the action is brought by the applicant. This also includes considering the likelihood of success, costs involved and consequences if the action is unsuccessful. Indemnity provided by the applicant is also a consideration. Assessment must also be made as to the resources required to pursue the action, resources available and the effect on other aspects of the business at [57].

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Rebuttable presumption under s 237(3) [14.440] In MG Corrosion Consultants Pty Ltd v Vinciguerra [2011] FCAFC 31, the full Federal Court confirmed that the “rebuttable presumption” under s 237(3) is not available where there has been a decision not to issue proceedings against a director at [62]. The court also explained that an application for leave under s 237 would be pointless if it required a full trial of the issues. The legislation directs that leave be granted, so as to enable a derivative action, at which time, the full facts will be established at [67].

Effect of liquidation [14.445] In Smart Company Pty Ltd (In Liq) v Clipsal Australia Pty Ltd [2011] FCA 35, it was found that the court does have an implied power to grant leave for proceedings to remain in the company’s name, despite going into liquidation. This is based on the court’s powers to permit proceedings brought on the half of the company, creditor or member in the course of winding up. Although it has been described as an inherent power, the court found it to be an implied power at [43]. However, in this case EGR (a member of the applicant) was found not to be a “fit and proper person in the corporate sense to maintain the proceedings” at [50]. This is due to EGR’s refusal to reveal who its beneficiaries were at [47]. The court agreed that s 236 was not available as the company is in liquidation at [8].

Effect of ratification on derivative action [14.450] Section 239 gives the court a discretion whether to take into account any ratification by the members when granting leave to bring an action on behalf of the company.

Costs of proceedings [14.455] Section 242 gives the court a broad discretion regarding orders for costs: see HPM Pty Ltd v Fear (2002) 171 FLR 12. The court can order the company to indemnify the applicant for the costs incurred in obtaining leave to proceed. This was affirmed in Re Wan Ze Property Development (Aust) Pty Ltd [2012] NSWSC 722, the plaintiffs sought an order that the defendants pay their costs of the proceedings on an indemnity basis and the order for costs was granted.

Why bring derivative proceedings? [14.460] A member who wishes to challenge a wrong done to the company now has a choice to bring either a derivative or personal action or a combination of the two. A variety of factors may influence that decision, for example: • the member may be unhappy about a company decision or action that has reduced the overall wealth of the company and thereby its members; [14.460] 775

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• the persons involved in the wrongful action or decision may be in control of the company and therefore in a position to prevent the company suing them; or • the cost of the legal action may be relevant – it is possible to seek an indemnity for legal costs as part of a statutory derivative action, which may make it a more attractive option than a personal action. Case study Charlton v Baber (2003) 47 ACSR 31 (Supreme Court of New South Wales)

[14.470] FACTS: Charlton and Baber were both members and directors of a company by the name of Newcastle Auto Air Pty Ltd. Newcastle Auto encountered financial difficulties, was placed into voluntary administration and later went into liquidation, following a creditors’ meeting and an application for winding up. In the course of its winding up, Charlton alleged that Baber had breached his directors’ duties owed to Newcastle Auto. Charlton applied under s 237 of the Corporations Act for leave to bring proceedings on behalf of Newcastle Auto pursuant to s 236. Charlton’s application on behalf of Newcastle Auto was challenged by Baber. DECISION: Leave was granted under s 237 of the Corporations Act for Charlton to commence proceedings on Newcastle Auto’s behalf against Baber for the alleged breach of directors’ duties. The court was satisfied that all of the criteria under s 237 were satisfied, namely: 1.

it was probable that the company itself would not bring proceedings since it was in liquidation and had limited funds (s 237(2)(a));

2.

the application by Charlton was made in good faith (s 237(2)(b));

3.

it was in the best interests of the company that the application proceed because if successful, it would provide benefit to the company (s 237(2)(c));

4.

the issues raised by Charlton’s application involved serious questions regarding alleged breach of directors’ duties (s 237(2)(d)); and

5.

Charlton provided sufficient notice of his intended application on behalf of the company: s 237(2)(e).

Oppression remedy [14.480] Relief from oppression can be obtained under Pt 2F.1. Note s 232: SECTION 232 Grounds for Court order The Court may make an order under Section 233 if: (a)

the conduct of a company’s affairs; or

(b)

an actual or proposed act or omission by or on behalf of a company; or

776 [14.470]

Remedies for Members

(c)

| TOPIC 14

a resolution, or a proposed resolution, of members or a class of members of a company;

is either: (d)

contrary to the interests of the members as a whole; or

(e)

oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or any other capacity.

For the purposes of this Part, a person to whom a share in the company has been transmitted by will or by operation of law is taken to be a member of the company. Note: For “affairs”, see s 53.

Who can apply for relief? [14.490] Section 234 allows an application to be made for relief by: • a member (as defined in s 231 – essentially a person whose name is on the register of members), whether personally affected or not, or acting in her or his capacity as a member or not; • a person removed from the register of members because of a selective reduction of capital; • a person who has ceased to be a member if the application relates to the circumstances in which membership ceased; • a person to whom a share in the company has been transmitted by will or operation of law; or • a person whom ASIC thinks appropriate having regard to its present or past investigations into the company’s affairs (under the former s 246AA(1)(b) ASIC itself had standing to apply for relief; it is not clear whether it can still do so). The oppression or unfairness need not be directed against the member applying, nor does the member have to have been a member at the time the conduct took place: Re Spargos Mining NL (1990) 3 WAR 166.

Conduct covered by s 232 [14.500] There are two limbs to conduct covered by s 232. The member must believe either: • that the affairs of the company are being conducted in a manner which is; or • that an act or omission or a resolution by the company or a class of members was, or would be; [14.500] 777

Business and Corporate Law

oppressive, or unfairly prejudicial to, or unfairly discriminatory against, a member or members, or contrary to the interests of members as a whole. The cases on the predecessor to Pt 2F.1 mainly involve small, proprietary companies. In these companies there is often a mutual understanding between members as to how the business is to be managed and no ready market for a disgruntled member to sell (compared with a listed public company). This statutory remedy has played an important role in protecting minority interests.

Some successful cases on oppression [14.510] It is fairly well established that courts will entertain a diverse range of issues when assessing an application by a member for oppressive conduct. The following are some examples where the courts have deemed conduct to be sufficiently oppressive under s 232 of the Corporations Act. Inaction by directors and company

[14.520] Re Bright Pine Mills Pty Ltd [1969] VR 1002: inaction can be regarded as oppressive. Scottish Co-operative Wholesale Society Ltd v Meyer [1959] 3 AC 324: allowing the company to languish is oppressive. Controlling member gains

[14.530] Re Overton Holdings Pty Ltd [1985] WAR 224: even though all members are treated equally, there can still be oppression if the controlling member gains an advantage because of the resolution. Gains by directors

[14.540] Sanford v Sanford Courier Service Pty Ltd (1986) 5 ACLC 394: feathering of their own nests by the directors is oppressive. Re East West Promotions Pty Ltd (1986) 4 ACLC 84: a director’s failure to account for company assets and using them in another similar business is oppressive. Restricting members' voting rights

[14.550] Shears v Phosphate Co-operative Co Australia Ltd (1989) 7 ACLC 812: alteration of the articles to restrict a member’s voting power is oppressive (see also Gambotto v WCP Ltd (1995) 182 CLR 432, but note that it was decided on purely general law grounds); Failure to pay dividends or review dividend policy

[14.560] Roberts v Walter Developments Pty Ltd (1997) 15 ACLC 882: a failure to pay dividends may be oppressive in view of the history of the company, its financial needs and the reasonable expectations of the members. Shamsallah Holdings Pty Ltd v CBD Refrigeration & Airconditioning Services Pty Ltd (2001) 19 ACLC 517: failure to review a company’s dividend policy to take its improving circumstances and profitability into account when, at the same time, the directors were taking steps to review their salary packages and vote themselves significant increases, was oppressive. 778 [14.510]

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Uncommercial loans

[14.570] Re George Raymond Pty Ltd (2000) 18 ACLC 85: making uncommercial loans to a company in which the dominant director of a family company had a material personal interest without disclosure and without obtaining the consent of the minority shareholders was oppressive. Exclusion from management

[14.580] Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672: a breakdown in the relationship between members of a family which led to one director, who had a legitimate expectation that he would be involved in managing the company operating the family business, being excluded from its management was oppressive, as were breaches of fiduciary duty by other directors of the company. Failure to provide information to a minority member

[14.590] Shum Yip Properties Development Ltd v Chatswood Investment & Development Co Pty Ltd (2002) 166 FLR 451: failure to provide any information about the company’s affairs or notices of meetings to a minority foreign shareholder was oppressive. Abuse of process

[14.600] Turnbull v NRMA (2004) 186 FLR 360 during an industrial dispute, members of the NRMA had requested the directors to call a meeting under s 249D. The dispute was resolved before the meeting took place and the court held that in these circumstances, requiring the meeting to proceed would be both contrary to the interests of the members as a whole and oppressive.

Some unsuccessful cases on oppression [14.610] There have been cases where the application made under s 232 of the Corporations Act has not been successful on the basis that the alleged conduct was judged not to have been unfairly prejudicial or unfairly discriminatory. The following cases provide a good illustration of conduct which was deemed not to be oppressive and contrary to s 232. Discrimination and good faith

[14.620] Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459 (High Court): although action might be discriminatory, it can still be in good faith for the benefit of the company as a whole. The court will consider whether the decisions of the directors were such that no board acting reasonably could have made them. Refusal to purchase shares

[14.630] Re G Jeffery (Mens Store) Pty Ltd (1984) 2 ACLC 421: refusal to purchase shares does not, of itself, amount to oppression. [14.630] 779

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Low profitability

[14.640] Thomas v HW Thomas Ltd (1984) 2 ACLC 610: dissatisfaction with low profitability and a conservative management style was not sufficient, in the context of a family company in which all the other members accepted that the company should operate in a financially conservative way. The court said that there must be a “visible departure from the standards of fair dealing.” Refusal to inspect company accounts

[14.650] Re Dernacourt Investments Pty Ltd (1990) 20 NSWLR 588: refusal to allow books to be inspected is not, of itself, oppressive. Exclusion from management

[14.660] O’Neill v Phillips [1999] 1 WLR 1092: excluding a minority shareholder from management is not of itself oppressive if a reasonable offer is made to purchase that person’s shares at a fair value. Dismissal of managing director

[14.670] Ground & Foundation Supports Pty Ltd v GFS Management Services Pty Ltd (2003) 21 ACLC 506: a proprietary company had three shareholders who were also its directors. At a meeting attended by all three directors, two of the directors resolved to terminate the appointment of the third as managing director. The relationship between the directors had broken down and the dismissal of the managing director was held to be in the interests of the company and, on the facts, was not oppressive.

Oppression can occur even where there has been no departure from the contractual position [14.675] In Tomanovic v Global Mortgage Equity Corp Pty Ltd [2011] NSWCA 104, it was a situation of two parties with successful businesses owned jointly and separately, determined to part ways. An agreement was struck between the parties to pass the interest of the appellant to the respondent for a substantial sum of money. It appeared that both parties had failed to appreciate tax burdens involved and, due to the global financial crisis, the net value of the business had fallen at [319]–[321]. The appellant requested to be reinstated as a director which was refused by the respondent. At first instance, the trial judge found that the agreement to sell the interest of the appellant to the respondent was unenforceable and a claim to estop the respondent from denying the agreements were binding also failed. The appellant then began proceedings under oppression, seeking an order that the respondent “buys out” his interests. Austin J found that as there was no binding contract or any applicable estoppel, there could be no “unfairness” resulting from the failure to separate the interests. Their Honours, Campbell JA, MacFarlan and Young JJA concluded that it is possible for oppression to occur even where there has been no departure from 780 [14.640]

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the contractual position at [176], [178], [326], [314]. Ultimately, oppression was made out and a “buyout” was ordered rather than an order for winding up at [307].

Remedies the court can grant [14.680] If satisfied that oppression has taken place, the court has a discretion under s 233(1) to grant any order it considers appropriate, including an order: • that the company be wound up; • that its existing constitution be modified or repealed; • regulating the conduct of company affairs in the future; • for the purchase of shares by any member or by the company; • directing the company to institute, prosecute, defend or discontinue specified proceedings, or authorising a member or members of the company to institute, prosecute, defend or discontinue specified proceedings in the name of and on behalf of the company; • appointing a receiver or a receiver and manager of any or all of the company’s property; • restraining a person from engaging in specified conduct or from doing a specified act; or • requiring a person to do a specified act. The court tries to remedy the causes of conduct, rather than wind up companies, especially if the company’s business is successful. The least intrusive remedy that will eliminate the oppression is to be preferred. This was evident in Ubertini v Saeco International Group SpA (No 4) [2014] VSC 47 which involves a complex set of facts pertaining to Ubertini and the distribution of Saeco coffee machines in Australia. It was a case where the oppressive conduct by both parties did not disentitle one party from relief and where the court was not willing to grant a winding up order if the granting of such an order would aid an ulterior motive of the party seeking the order. In this case, Ubertini negotiated the distribution rights for Saeco coffee machines in Australia. He incorporated Saeco Australia and managed the company which was very successful to the point that Saeco International purchased 60% of the shares from Ubertini (and his related holdings) for approximately $2.4 million. Ubertini agreed to stay on as manager. Subsequently, Ubertini’s personal circumstances changed and he requested that Saeco International find someone else to manage Saeco Australia. Saeco International agreed and also agreed to purchase the remaining shares from Ubertini. Unfortunately, the negotiations for the sale and appointment of a new manager were unsuccessful. Both parties attempted to maximise their negotiating positions. However, Saeco International determined that it should [14.680] 781

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place Saeco Australia into administration. Its directors voted in favour of the resolution, Ubertini voted against it with another member of the board abstaining. Ubertini requested the court make a finding of oppressive conduct on the part of Saeco International. He contended nine separate categories of oppression. Saeco International counterclaimed that Ubertini had engaged in conduct which was oppressive to it. The court found that both parties had engaged in oppressive conduct, however, that Ubertini’s oppressive conduct toward Saeco International did not disentitle him to relief. Of particular interest are the findings surrounding the administration of Saeco Australia. The court found that Saeco International had issued invoices and claims for money which, whilst some amounts were legitimate, were largely part of a plan to obtain Saeco Australia without paying shareholders for the remaining shares at [532], [538]. The court found that, consistent with the plaintiffs submissions, that Saeco International had breached s 232(e). His honour found that it was unnecessary to consider s 232(d) as the conduct fell “squarely” within (e) at [536]. Saeco International had applied for an order from the court that Saeco Australia be wound up. Instead, the court found that an order to wind up Saeco Australia would be simply aiding the plans of Saeco International to obtain the company without paying the shareholders. Instead, the court ordered Saeco International to pay for the remaining shares in Saeco Australia at [539], [540], [546].

Statutory injunction [14.690] The Corporations Act gives the court a very broad power to grant an injunction in respect of a breach or threatened breach of the Corporations Act. Note s 1324(1): SECTION 1324(1) Injunctions (1)

782 [14.690]

Where a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute: (a)

a contravention of this Act; or

(b)

attempting to contravene this Act; or

(c)

aiding, abetting, counselling or procuring a person to contravene this Act; or

(d)

inducing or attempting to induce, whether by threats, promises or otherwise, a person to contravene this Act; or

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(e)

being in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of this Act; or

(f)

conspiring with others to contravene this Act;

the court may, on the application of ASIC, or of a person whose interests have been, are or would be affected by the conduct, grant an injunction, on such terms as the court thinks appropriate, restraining the first-mentioned person from engaging in the conduct and, if in the opinion of the court it is desirable to do so, requiring that person to do any act or thing.

Conduct caught by s 1324 [14.700] Section 1324 applies to an actual, continuing or imminent breach of the Corporations Act by the company itself and to persons involved in the company’s contravention. The court also has power to award damages in addition to, or instead of, an injunction: s 1324(10).

Who may apply under s 1324? [14.710] Section 1324 allows ASIC or a “person whose interests have been, are or would be affected by the conduct” to apply for an injunction. As well as members, this expression has been interpreted as giving standing to creditors: Allen v Atalay (1993) 12 ACLC 7; and Airpeak Pty Ltd v Jetstream Aircraft Ltd (1997) 73 FCR 161.

When can a person apply under s 1324? [14.720] Section 1324 applies only to breaches of the Corporations Act, not breaches of the general law. In Mesenberg v Cord Industrial Recruiters Pty Ltd (1996) 39 NSWLR 128, Young J adopted a very narrow interpretation of s 1324, holding that s 1324 could not be used by members to complain about breaches of civil penalty provisions in the Corporations Act, such as directors’ statutory duties in Pt 2D.1. He held that s 1324 was only available to ASIC in relation to breaches of Pt 2D.1. However, other judges in more recent cases have doubted whether this interpretation of the section is correct: Airpeak Pty Ltd v Jetstream Aircraft Ltd (1997) 73 FCR 161; and Emlen Pty Ltd v St Barbara Mines Ltd (1997) 15 ACLC 1107; and McCracken v Phoenix Constructions (Qld) Pty Ltd [2012] QCA 129. In Armstrong world industries (Australia) Pty Ltd v Parma [2014] FCA 743, his Honour, Beach J clarified the difference between an injunction granted under s 1324(4) and an injunction granted under s 23 of the Federal Court of Australia act 1976 (Cth). An additional factor under s 1324(4) is the “utility or purpose” of the injunction – “such as preventing or ameliorating a threatened [14.720] 783

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contravention of the act” at [22]. His honour found that s 1324(4) “is in form and partly in substance different to the equitable basis, which is discussed in Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57” at [21].

Procedural irregularities: Section 1322 [14.730] Where a procedural irregularity (such as lack of notice or failure to call a poll) has caused substantial injustice, the aggrieved members may apply to the court under s 1322(2). In Mamouney v Soliman (1992) 10 ACLC 1674, the company called a meeting to pass a number of special resolutions to alter its constitution. The notice of the meeting was deficient in terms of its timeliness, distribution and content. The resolutions were passed at the meeting by a small majority. One of the effects of the resolutions was to relegate certain voting members to non-voting status. The resolutions were declared invalid by the court. The reasoning in Gambotto v WCP Ltd (1995) 182 CLR 432 (regarding the alteration of the constitution to expropriate “valuable proprietary rights attaching to shares”) would, by analogy, seem to support this result.. Weinstock v Beck [14.735] Weinstock v Beck [2013] HCA 14 (High Court of Australia) In Weinstock v Beck [2013] HCA 14, the High Court looked into the interpretation of s 1322(4) and overruled the decision of the Court of Appeal. Background: This case involved a corporation formed by a mother and father, as directors, who attempted to appoint their two children Amiram and Tamar as additional directors. The constitution of the corporation held that while the existing directors were able to appoint additional directors, those directors only hold office until the next following annual general meeting. This means that the additional directors ceased to be directors at the beginning of the annual general meeting. The quorum for the meeting was two members of the company. Unfortunately, the father died and the mother was taken ill with Alzheimer’s disease. Tamar had resigned decades earlier leaving Amiram the only remaining director. He attempted to appoint his wife Helen as another director. Tamar made an application to the court that the company be wound up as it no longer had any validly appointed directors. Amiram and Helen applied to the court under s 1322(4)(a) for a declaration that the appointment of Helen was not invalid. This was successful in the first instance (Barrett J), however, on appeal, Young JA and Sackville A-JA set the order aside. This is the appeal to the High Court after special leave was acquired. Court of Appeal: The Court of Appeal found that s 1322(4)(a) should not be interpreted liberally and that with the act stipulates a “contravention”, whilst that was not limited to “infringement”, the appointment of Helen was not such a “contravention”. Campbell JA in dissent, found that a “contravention” was satisfied when “something had happened that is different to what the Constitution of the corporation requires”. In fact, Campbell JA found that Amiram had been a de facto director as defined by s 9 of the Corporations Act at [35]. 784 [14.730]

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High Court: The High Court overruled the Court of Appeal. The High Court found that s 1322 should be interpreted widely. French CJ found that, contrary to submissions by Tamar that this was not simply a case of non-compliance, but the exercise of power which is simply not available: It is not appropriate to torture a limit out of the language of s 1322(4)(a) against the extreme case of a stranger to the company purporting to make a decision appointing another stranger as a director. Extreme cases are amply covered by the discretionary nature of the power and the constraints upon its exercise imposed by s 1322(6). The present case was not an extreme case. Amiram was not a stranger to the company. He had discharged the functions of a director for 30 years owing, as an officer of the company, the obligations that were imposed upon him notwithstanding the cessation in December 1973 of his appointment as a director, a cessation of which he was evidently unaware. This was a case falling within the scope and purpose of s 1322(4)(a). [43] Orders were made to overturn the decision of the Court of Appeal, removing the invalidity of Helen’s appointment as director.

Class actions by ASIC [14.740] Under s 50 of the Australian Securities and Investments Commission Act 2001 (Cth), ASIC can bring a “class action” on behalf of members or investors to recover damages for fraud, negligence, breach of duty or other misconduct. The action must be in the public interest and result from an ASIC investigation – for example, action taken by ASIC on behalf of investors following the collapse of the Pyramid Building Society in Victoria. In Australian Securities Commission v Deloitte Touche Tohmatsu (1996) 70 FCR 93, the Full Court of the Federal Court held that s 50 gave ASIC a very broad discretion in making a judgment as to whether it was in the public interest to commence a proceeding under s 50 and that the agreement of the board of directors was not necessary.

Winding up [14.750] Section 461(1) deals with winding up by the court. There are four parts of the section which provide a possible remedy for aggrieved members: s 461(1)(e) – (g) and (k). SECTION 461(1) General grounds on which company may be wound up by Court The Court may order the winding up of a company if: (a)-(d) … (e)

directors have acted in affairs of the company in their own interests rather than in the interests of the members as a whole, or in any other manner whatsoever that appears to be unfair or unjust to other members; or [14.750] 785

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(f)

affairs of the company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members or in a manner that is contrary to the interests of the members as a whole; or

(g)

an act or omission, or a proposed act or omission, by or on behalf of the company, or a resolution, or a proposed resolution, of a class of members of the company, was or would be oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members or was or would be contrary to the interests of the members as a whole; or

(h)-(j) … (k)

the Court is of opinion that it is just and equitable that the company be wound up.

Section 461(1)(e) [14.760] The use of the term “directors” in s 461(1)(e) does not mean that the board of directors has to act in concert. It is sufficient if the effective majority of directors act in this way: Cumberland Holdings Ltd v Washington H Soul Pattinson & Co Ltd (1976) 1 ACLR 361. Conduct does not have to be “unfair or unjust” to members as a whole. It is the “interests” of members which are relevant.

Section 461(1)(f)-(g) [14.770] The grounds in s 461(1)(f) – (g) are the same as those provided in s 232 (oppressive or unfairly prejudicial conduct) and the arguments will also be similar. However, as winding up is a drastic remedy, Tomanovic v Global Mortgage Equity Corp Pty Ltd [2011] NSWCA 104, the courts will be more reluctant to grant it than other possible remedies under s 233(1).

Section 461(1)(k) [14.780] Under s 461(1)(k), the “just and equitable” ground, the court can give relief even though what is being done is strictly legal. The classic illustration is Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 which involved a breakdown in mutual trust and confidence between the parties. Case study Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 (House of Lords)

[14.785] FACTS: Ebrahimi and Nazar had been in partnership dealing in carpets from 1945 until 1958. They then formed a private company to carry on the business. They were the only shareholders and directors and each had 500 shares in the company. Later, Nazar’s son also became a director and Ebrahimi and Nazar each transferred 100 shares to him. The company never paid any 786 [14.760]

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dividends, all profits were distributed to the directors as directors’ fees. In 1969 the relationship between Ebrahimi and Nazar broke down and the Nazars used their majority in the general meeting to pass a resolution removing Ebrahimi from the board. Ebrahimi applied to have the company wound up on the just and equitable ground. DECISION: The House of Lords held that, even though there was power in the company’s constitution to remove a director, because Ebrahimi’s removal also had the effect of excluding him from management and profits, his removal (in the context of that particular company) was unjust. His petition for winding up was successful. (Ebrahimi’s application for alternative relief on the ground of oppression failed because of the restrictive wording of the English equivalent to Pt 2F.1 in force at that time.)

Other examples, but not closed categories, of winding up under s 461(1)(k) include: Breakdown of mutual trust and confidence

[14.790] Re Wondoflex Textiles Pty Ltd [1951] VLR 458: again there was a small company resembling a partnership, and the court held that exclusion from management was a sufficient reason for winding up. Kokotovich Constructions Pty Ltd v Wallington (1995) 13 ACLC 1113: the fact that one shareholder had tried to allot sufficient shares to make the other shareholder’s holding virtually worthless was sufficient grounds for a winding up order. Stapp v Surge Holdings Pty Ltd (1999) 17 ACLC 896: when their relationship broke down, the fact that one of the only two shareholders in a property development company excluded the other from deciding on the application of the proceeds of a transaction, made false representations to the other about this matter and refused the other access to the company’s books was held to be sufficient grounds for a winding up order; see also the similar fact situation in Malos v Malos (2003) 44 ACSR 511. Deadlock

[14.800] Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426: here there was no oppression, but the two directors had fallen out to such a degree that they no longer even spoke to each other. The court felt it was just and equitable to wind up the company because this incompatibility would not have been contemplated when the company was formed. Re Superbee Pty Ltd (1989) 7 ACLC 418: the company was also wound up because of irreconcilable differences; see also Gregor v British-Israel-World Federation (NSW) (2002) 41 ACSR 641. Fraud, misconduct or oppression

[14.810] Loch v John Blackwood Ltd [1924] AC 783: the major member, together with her nominee directors, controlled the company and the two minority [14.810] 787

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members were kept ignorant of the true state of the company. The major member hoped to acquire the minority’s shares at an undervalue. The court found there was a “lack of probity” on the part of the controller – in other words, that she could not be trusted and, therefore, the company should be wound up: see also DCT v Casualife Furniture International Pty Ltd (2004) 9 VR 549. Failure of substratum

[14.820] Re Tivoli Freeholds Ltd [1972] VR 445: in this case, the nature of the company’s business was drastically changed (that is, the common aim of the company had gone) and, even in the absence of oppression, winding up was granted. Winding up is a drastic remedy, Tomanovic v Global Mortgage Equity Corp Pty Ltd [2011] NSWCA 104, particularly as the assets in liquidation may be worth less than if the company were a going concern. Consequently, the courts provide opportunity for the parties to reach an agreement if possible. A further factor that the court will consider is whether the applicant seeking winding up has come to court with clean hands – that is, is not guilty of any misconduct: compare Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 with the more recent Australian decisions in Ruut v Head (1996) 20 ACSR 160 and Guerinoni v Argyle Concrete & Quarry Supplies Pty Ltd (1999) 34 ACSR 469.

Restitution rights of members [14.830] The High Court has recently drawn a distinction between a member claiming a right or remedy in her or his capacity as a member of the company and a member claiming a right or remedy against the company in an alternative capacity. According to the High Court the distinction is important because a member’s right to claim against a company may be founded not in the capacity as a member but instead in an alternative capacity which would survive an insolvency and provide the member with the right to lodge a claim with a liquidator. The right that is enjoyed by the member is akin to a restitution right in their favour, one which is grounded in the company’s obligation to pay damages because loss was occasioned by a wrong committed by the company. The issue concerning the surviving restitution rights of members in the event of an insolvency arose in the High Court case of Sons of Gwalia Ltd v Margaretic (2007) 231 CLR 160. Case study Sons of Gwalia Ltd v Margaretic (2007) 231 CLR 160 (High Court of Australia)

[14.835] FACTS: In August 2004, Margaretic purchased 20,000 fully paid ordinary shares in Sons of Gwalia Ltd (“SOG”), a listed mining and exploration company. In the same month, the directors of SOG decided to appoint an administrator to the company, having formed the opinion that the company was either insolvent or near insolvency. Margaretic claimed that when he 788 [14.820]

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purchased the shares in SOG, the company was in breach of its continuous disclosure obligations under ss 674 and 675 of the Corporations Act for failing to properly inform the market in a timely manner of the financial difficulties confronting SOG. Alternatively, Margaretic claimed that SOG’s failure amounted to conduct that was misleading or deceptive and in contravention of s 52 of the Trade Practices Act 1974 (Cth), s 1041H of the Corporations Act and s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth). As a result of the alleged company wrong, Margaretic claimed damages under statute, under common law and in equity. Margaretic intended to submit his damages claim as a creditor of SOG and further claimed that he was entitled to all of the rights of a creditor under Pt 5.3A of the Corporations Act, including the right to attend and vote at a creditors’ meetings and the right to receive information provided to creditors. The administrator of SOG objected to Margaretic’s claim on the basis that Margaretic was a member of SOG and therefore could not be deemed a creditor nor enjoy the rights of creditors under Pt 5.3A. DECISION: The High Court agreed with Margaretic and held that his claim for damages for the alleged wrong committed by SOG could be brought under Pt 5.3A. According to Heydon J (at [206]): In so far as the claim is put forward in the tort of deceit, it is a claim that stands altogether apart from any obligation created by the 2001 Act and owed by the company to its members. Those claims are not claims “owed by a company to a person in the person’s capacity as a member of the company”. For these reasons, s 563A does not apply to the claim made by Mr Margaretic.

In providing members the right to pursue claims in an alternative capacity other than as members, the High Court has given recognition to the restitution rights belonging to members. The High Court in Sons of Gwalia were prepared to uphold the rights of members which are grounded in the law of obligations, as stated by Heydon J at [205]-[206]: if money is paid to the company to create the relationship of member (as will be the case when a person subscribes for shares) the company’s obligation to pay damages for fraudulent misrepresentation inducing that subscription, or to pay damages because loss was occasioned by the company’s misleading or deceptive conduct, will not, in the absence of specific legislative provision to the contrary, be an obligation whose foundation can be found in the legislative prescription of the rights and duties of members … In the present case, the obligation which Mr Margaretic seeks to enforce is not an obligation which the 2001 Act creates in favour of a company’s members. The obligation Mr Margaretic seeks to enforce, in so far as it is based in statutory causes of action, is rooted in the company’s contravention of the prohibition against engaging in misleading or deceptive conduct and the company’s liability to suffer an order for damages or other relief at the suit of any person who has suffered, or is likely to suffer, loss and damage as a result of the contravention.

[14.835] 789

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Corporations Amendment Sons of Gwalia Act 2010 (Cth) [14.840] In response of the High Court’s decision in Sons of Gwalia Ltd v Margaretic (2007) 231 CLR 160, amending legislation was introduced into Parliament in 2010 following a discussion paper that had been prepared by the Corporations and Markets Advisory Committee (CAMAC): “Shareholder claims against insolvent companies: Implications of the Sons of Gwalia decision Discussion Paper” (September 2007). Concern had been expressed by a number of commentators including investor groups and creditors that the High Court’s decision would have increased the costs associated with a company’s ability to secure debt financing. It was also asserted that the High Court’s decision in support of members’ rights could disadvantage unsecured creditors and lenders by increasing the number of potential claimants. CAMAC was asked to consider whether the position as stated by the High Court should be retained or changed, so that any claims made by members will be brought in the capacity of a member of the company rather than some other alternative capacity or legal basis. Increased costs and difficulty in maintaining access to credit markets, particularly for companies that have been experiencing financial distress were considered to be grounds for reversing the High Court’s ruling. Moreover, there were concerns that the practical effect of the High Court’s decision would be to shift the losses for shareholder claims away from those responsible for the conduct that gave rise to the loss or damage and instead transfer responsibility onto unsecured creditors. The Corporations Amendment (Sons of Gwalia) Act 2010 (Cth) (Sons of Gwalia Act) sought to reverse the effect of the High Court’s ruling which had allowed shareholder claims in the form of damages to rank equally with unsecured creditors in a windup. The High Court had ruled that a compensation claim in the form of damages brought by a shareholder against a company was not subordinated by virtue of s 563A of the Corporations Act. The Sons of Gwalia Act reverses the High Court’s decision so that any claim brought by a shareholder against a company that arose from the buying, selling, holding or other dealing with a shareholding is to be postponed in a windup until after all other claims have been paid. The claims that will be postponed include judgment debts that have been entered into against a company. Hence, claims for compensation, including damages awards against a company, would be subordinated below the claims of other creditors in the event of external administration. In Roumanus v Orchard Holdings (NSW) Pty Ltd (In Liq) [2012] FCA 775, shareholders made a claim against two directors who were spooking investments in Orchard Holdings. The claim extended to making the corporation liable as an accessory for the conduct. His Honour, Foster J considered that, similar to the failure to meet continuous disclosure requirements in Sons of Gwalia Ltd, a case based on “positive misrepresentations provided that the corporation is found to have made the 790 [14.840]

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relevant misrepresentation or is relevantly held liable as an accessory in respect of the conduct of others” would hold the same reasoning at [44]. However, his Honour found that the corporation did not make the offending representations and was not an accessory to the contraventions at [182]. The complexity of the subordinate claim under s 563A and rights if the claim against the company is postponed under s 600H were examined by the Federal Court in the case of Re QRxPharma Limited (Administrators Appointed) [2015] FCA 1140. In that case Jagot J, inter alia, made orders that a more “restricted” form of notification to those former shareholders should occur.

Other Rights and Remedies [14.850] Apart from the legal remedies to be discussed in this Topic, there are a number of other mechanisms which work to limit the effect of divergences of interest between controllers of companies and their minority members. These include: • member voting rights – for example, under provisions of the Corporations Act which require members to approve certain transactions before they take place; • enforcement of the Corporations Act by ASIC and, in relation to publicly listed companies, enforcement of the Listing Rules by the ASX; and • market forces, such as capital markets in the case of publicly listed companies.

[14.850] 791

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Figure 14.2: Members’ remedies for breaches of directors’ (and officers’) duties

Revision questions 1

2

Foters Ltd (Foters) is a company listed on the ASX. The company has 10 million shares on issue. Jock Snoz currently holds 400,000 shares in Foters and has asked his broker to buy 400,000 more. Suppose that Jock's broker is able to obtain only 250,000 shares immediately on his behalf. (a)

What are Jock's obligations, if any?

(b)

Suppose the broker is able to complete the buy order a week later. Does Jock have any further obligations? Explain.

Roseneath Pty Ltd (Roseneath) has the following provision in its constitution: The right of the members to transfer shares in the Company is restricted in that the directors may at any time in their absolute discretion decline to register any transfer of shares.

792 [14.850]

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Stephen is in financial difficulty. He approaches his cousin, Julia, and asks if she is interested in purchasing his shareholding of 2,000 shares in Roseneath. Julia pays $4,000 to Stephen and a duly executed and stamped transfer is forwarded to Roseneath with a request for registration. The board of directors refuse to register the transfer and promptly send Julia notice to this effect. The notice gives no reasons for their decision. Stephen's other cousin, Jack, was at the board meeting in his capacity as company secretary. He says that the board were concerned that “Julia is an interfering, emotional female”. Does Julia have any remedy under the Corporations Act? 3

4

Abigail is an expert computer hacker. She has managed to obtain the security holder reference number (SRN) of a person who had several thousand shares in a public company. Abigail then sold these shares through an online broker representing herself as the true holder of the shares and convinced her bank to pay the cheque for the price into her account even though she was not the payee named in it. Abigail then disappeared with the proceeds. (a)

Who will bear the loss if Abigail cannot be apprehended – the online broker she used, the shareholder whose name was used or some other person? Explain.

(b)

Outline the changes that will probably be made to the company's electronic register as a result of Abigail's activities.

Morris, John and Paul are directors and shareholders of Newry Property Developments Pty Ltd (NPD), a property development company which owns and operates a tavern. Morris and John are brothers. John and Paul are friends and partners in an accounting firm. Morris is an unemployed artist and sole parent of three young children. The total number of issued shares in NPD is 6,000 ordinary shares. Each shareholder has 2,000 shares. All the shares are fully paid. NPD has been very successful but has not paid any dividends to its members for the last two years. Profits have instead been invested in further development projects. Morris' wife has recently died and he is very short of money to look after his family. He approaches John and Paul and asks them to consider whether NPD could begin to pay dividends again to its members. John and Paul refuse to consider Morris' request as it would upset the “long-term goals of NPD”. Morris is upset by this response and announces that he wants to sell his shares. John and Paul refuse to buy him out and demand that Morris resign as a director because he has lost his objectivity. Morris resigns reluctantly. He asks to see NPD's most recent set of financial statements. John and Paul refuse to provide the information. Morris

[14.850] 793

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discovers accidentally that NPD has been paying large “management fees” to John and Paul's accounting firm. Morris consults you as his legal adviser. He wants to know: • Should he bring a derivative or personal action against John and Paul? What factors should he take into account in making this decision? • If he brings a personal action, should he bring it under the general law or make an oppression claim under s 232? What factors would influence your recommendation? • If successful, what remedies should he seek? 5

Alan, Bill and Clare were the directors and shareholders of Sailfree Pty Ltd (Sailfree) which distributes and sells boating equipment. Alan and Bill each had 300 shares in Sailfree while Clare had 200 shares. All three of them actively participated in the company's management. Last year Clare suffered a mild heart attack and decided that she should resign from the board of Sailfree and transfer her shares to her daughter, Gail. Alan and Bill did not object and the transfer was registered. Shortly afterwards, Alan discovered that Gail's fiancée, Tom, was a major shareholder in and a director of a large interstate company that intended to expand its business and would possibly be a serious competitor to Sailfree. Alan called a general meeting of Sailfree which passed a special resolution adopting the following internal rule: If a member or the spouse or child of a member carries on or is a director of a business that in the opinion of the directors is a competitor or a potential competitor of Sailfree, the directors may require that member to sell her or his shares to a person named by the directors at a fair price fixed by an independent expert appointed by the directors.

The resolution was passed by Alan and Bill, who were the only people at the meeting. Gail was on her honeymoon in the Cook Islands at the time and did not receive the notice of meeting until she returned home. When she returned, she was given a notice requiring her to sell half her shares to Alan's wife, Sue, and half to Bill's wife, Helen, at a price of $20 per share (the value put on the shares by Graeme, the independent expert appointed by Alan and Bill). Gail does not want to sell her shares in Sailfree. Advise Gail: • whether the meeting had power to adopt the internal rule set out above; and • whether she has any grounds to challenge the notice requiring her to sell her shares. 6

Bob and his nephew, Tom, are the only shareholders in MX Pty Ltd (MX). Bob holds 3,002 shares and Tom holds 5,002 shares. Bob and his wife, Elaine, are the only directors of MX, a family company formed by

794 [14.850]

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Tom's grandfather as an investment vehicle for the family's property. Tom inherited his shares in MX from his mother, who died when he was a child, and has little knowledge of the company's affairs. Bob, who was Tom's guardian until he attained his majority, has always managed the affairs of MX. Tom is now 25 and has recently become aware of documents purporting to be minutes of general meetings of MX at which Tom was shown as being present and at which resolutions were passed appointing Bob and Elaine as directors of MX; declaring dividends (which Tom did not receive); approving the payment of directors' fees to Bob and Elaine and approving a buy-back scheme. Tom was unaware that these meetings had been held and knew nothing about these resolutions, which he had purportedly approved. These discoveries have led to a complete breakdown in the relationship between Tom and his uncle. Advise Tom on the remedies that may possibly be available to him under the Corporations Act.

[14.850] 795

TOPIC 15 Share Capital Principles........................................................................................ Introduction.................................................................................... Legal nature of a share ...................................................................... Types of shares ................................................................................ Specification of share capital............................................................... Circumstances in which companies issue shares ..................................... Issue of shares to the public................................................................ Share capital ................................................................................... Valuation of shares............................................................................ Issue price ...................................................................................... Partly paid shares ............................................................................. Issue for consideration other than cash ................................................. Restrictions on share issues................................................................. Share options, rights issues and dividend reinvestment plans ....................

[15.10] [15.10] [15.20] [15.50] [15.60] [15.70] [15.80] [15.140] [15.160] [15.170] [15.180] [15.190] [15.200] [15.240]

Extract from J Yogaratnam and L Xynas, Corporations Law: In Principle (10th ed, Lawbook Co., 2017), Chapter 16.

Aim At the end of this Topic you should understand: • what is a company’s “share capital”; and • the legal requirements and procedures applying to the allotment and issue of shares.

PRINCIPLES Introduction [15.10] In general terms, the capital of a company is made up of equity and debt. The ratio of debt to equity is called gearing. Equity is the amount available to members of the company after all liabilities have been paid. A company limited by shares obtains equity by the issue of shares in return for contributions of capital from the members. A company has the power to issue its own shares: s 124(1)(a) of the Corporations Act 2001 (Cth) (Corporations Act). Debt is capital obtained by borrowing money privately (for example, from a bank) or publicly (for example, from members of the public in return for debentures in the company). The circumstances in which companies issue shares are regulated by Ch 2H (ss 254A – 254Y) of the Corporations Act (“the share capital rules”).

[15.10] 797

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Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act) [15.12] The CATSI Act does not have similar provisions in relations to shares as the Corporations Act 2001 (Cth). This is because members of an Aboriginal and Torres Strait Islander corporation cannot own or trade shares in their corporation. However, such a corporation may hold shares in a body corporate that does have shares (see Division 689—Subsidiaries and control).

Legal nature of a share Property rights [15.20] A share is an item of personal property, separate from the company’s property: s 1070A. As property, shares attract the rights and benefits provided by the principles of property law. They also attract rights and benefits under a company’s internal rules, the Corporations Act and the general law. Shares are considered to be property capable of being transferred, inherited, disposed and used as security or collateral. Ordinarily, shares also provide members with a bundle of property rights including: 1. 2. 3.

the right to vote (s 253C); the right to receive notice and attend meetings (s 252G); and the right to receive a dividend once declared by the board: s 254W.

In this sense, shares are often said to have the qualities of property similar to other forms of personal property. The proprietary nature inherent in shares was explored by the High Court of Australia in the landmark case of Gambotto v WCP Ltd (1995) 182 CLR 432. The High Court in Gambotto was of the view that shares provided members with valuable proprietary rights that could not be expropriated unfairly.

Property rights and securities lending [15.30] In a decision handed down by the Federal Court in Beconwood Securities Pty Ltd v ANZ Banking Group [2008] FCA 594 the court examined the proprietary rights attached to shares. Case study Beconwood Securities Pty Ltd v ANZ Banking Group [2008] FCA 594 (Federal Court of Australia)

[15.40] FACTS: A dispute arose between the ANZ Bank exercising its rights as a secured creditor and shareholders in Opes Prime Stockbroking Ltd (OPS). OPS collapsed in 2008 and the ANZ Bank exercised its rights over the assets of OPS, which included the shareholdings of a large number of clients belonging to OPS. Central to the issue were the property rights of shareholders who had 798 [15.10]

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purchased shares in a number of listed companies on the ASX and who had contracted with OPS as their designated broker. The relationship between the shareholders (Beconwood) and OPS was documented in an agreement entitled “Securities Lending and Borrowing Agreement.” Under the agreement, the ANZ Bank lent money to the clients of OPS to purchase shares in a number of listed companies on the ASX. One of the clients of OPS was the plaintiff, Beconwood. In return for the money that was advanced by ANZ Bank, Beconwood transferred legal ownership of its purchased shares to OPS. A dispute arose when OPS collapsed and the ANZ Bank exercised its rights as a secured creditor under the agreement. ANZ sought to enforce its rights under the agreement by disposing of a number of shares in a variety of listed companies held by OPS. Beconwood argued that it still retained a security interest, in the form of an equitable interest or an interest as a mortgagor, over the shares it had purchased through OPS. DECISION: Finkelstein J decided that the ANZ Bank could exercise its interests as a secured creditor and sell all of the shares purchased by OPS clients, including the shares purchased by Beconwood. According to his Honour, the Securities Lending and Borrowing Agreement entered into between OPS and Beconwood did not create a mortgage interest or an equitable interest in favour of Beconwood. Instead, the agreement caused Beconwood to transfer it property rights in the purchased shares to OPS. At the time OPS collapsed, the ANZ Bank could exercise its rights as a secured creditor over the assets of OPS, including all of the client shareholdings belonging to OPS.

Types of shares [15.50] A company may issue different types of shares, referred to in the Corporations Act as “classes of shares”. Shares may differ as to the terms on which they are issued and the rights and restrictions attaching to them: s 254B. The bulk of company shares are known as ordinary shares. The Corporations Act does not define “ordinary share”. Shares are said to be ordinary shares when no special rights or restrictions attach to them. Apart from ordinary shares, companies can also issue preference shares: s 254A(1)(b). Preference shares have special rights attaching to them, usually the right to receive payment of dividends in priority to ordinary shares.

Specification of share capital [15.60] At the time of registering a company, a company must lodge an application with ASIC which includes information on the initial share capital of the company.

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SECTION 117(2)(k) (2)

The application must state the following: (a)-(j) … (k)

for a company limited by shares or an unlimited company – the following: (i)

the number and class of shares each member agrees in writing to take up;

(ii)

the amount (if any) each member agrees in writing to pay for each share;

(iia)

whether the shares each member agrees in writing to take up will be fully paid on registration;

(iii)

if that amount is not to be paid in full on registration – the amount (if any) each member agrees in writing to be unpaid on each share;

(iv)

whether or not the shares each member agrees in writing to take up will be beneficially owned by the member on registration;

The information required by s 117(2)(k) of the Corporations Act serves only as a historical record of the company’s share capital at the time of its registration. It does not prevent the company from issuing additional shares to the initial members or to other people (individuals or other companies) who become members of the company after registration. New shares may be issued at the amount stated in the application or for different amounts. The only requirement is that the company notify ASIC of any subsequent share issues: s 254X.

Circumstances in which companies issue shares [15.70] A company can either issue shares privately to certain people, or it may invite the public to subscribe for shares. An example of a private issue is a transaction by which a sole trader or partnership sells its business to a company in return for shares in the company: see Salomon v Salomon & Co Ltd [1897] AC 22. An example of a public issue is a floatation of shares by which a public company offers its shares to investors at large. Both public and private companies may also issue shares by: • a placement through a broker for subscription by particular investors, such as institutional investors; • a rights issue, such as when shares are offered by a company to existing shareholders on a pro-rata basis at an issue price lower than market value; 800 [15.70]

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• a bonus share issue whereby a company distributes profits to its shareholders in the form of shares. The company treats the profits as if the shareholders received them and then immediately gave them back to the company to pay for additional shares; or • a dividend reinvestment scheme under which shareholders forgo payment of dividends in return for new shares issued to them, usually at a discount to market value.

Issue of shares to the public Disclosure requirements [15.80] Issues to the public must, at present, be undertaken by way of a prospectus or other disclosure document released by the company and must generally comply with the requirements contained in Ch 6D of the Corporations Act. Significant changes were made to fundraising requirements by the Corporate Law Economic Reform Program Act 1999 (Cth) (CLERP Act), the Financial Services Reform Act 2001 (Cth) and the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (Cth) (CLERP 9 Act). As discussed in Topic 18, fundraising disclosure under Ch 6D is required for an issue of securities to retail investors: ss 704, 706 and 708(8). Content for the disclosure document/prospectus is determined by a general disclosure test under s 710. The main purpose for a disclosure document is to provide relevant information to investors so they have the ability to make an informed decision regarding the allocation of their investment dollars. At a minimum, the disclosure document must provide information to investors concerning the rights and liabilities attaching to the securities that are offered as well as relevant financial information, including balance sheets and profit and loss statements: s 710(1). In addition, there are specific items warranting disclosure which are contained in s 711 of the Corporations Act.

Application for shares [15.90] An application form must be attached to the prospectus or disclosure document. This is merely an “invitation” by the company for people to invest in it by purchasing its shares. An investor subscribes for shares by completing and lodging the form. The investor’s application constitutes an offer which the company can reject or vary, for example, in the case where there is an over-subscription for the company’s shares. The company issues shares to a successful applicant.

Issue of shares [15.100] At the time the shares are issued to a shareholder, the shareholders receives: • a “holding statement”; and [15.100] 801

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• a Securityholder Reference Number (SRN) as evidence that they been issued with (sometimes referred to as “allotted”) shares in the company. An applicant for shares does not become a member of the company until after the applicant’s name is entered in the register of members: Maddocks v DJE Constructions Pty Ltd (1982) 148 CLR 104.

Requirements before company issues shares [15.110] If a public company offers shares or other securities and the offer requires a disclosure document, the company cannot issue (or, in some cases, transfer) any securities: • unless the issue is in response to an application form that accompanied the disclosure document (s 723(1)); • if the disclosure document included a minimum subscription condition (the minimum amount which, in the opinion of the directors, must be raised to get the company started), until that condition is satisfied (s 723(2)); and • if the disclosure document stated or implied that the securities were to be quoted on the ASX or another securities exchange, unless an application for quotation is made with seven days of the date of the document or the securities are quoted within three months, the issue will be void and the money must be returned to the applicant(s) as soon as practicable: s 723(3). Publicly listed companies must notify ASIC and the ASX of any share issues: s 254X and ASX Listing Rule 3.10.5. Figure 15.1: Public share issue timeline

[15.120] Note: see Topic 18. See also Chapter 9 (Yogaratnam).

Improper issues [15.130] Under s 254E, the court can validate an otherwise improper issue on the ground that it is just and equitable to do so: see Re Monitronix Ltd (1987) 5 ACLC 1063; Re The Swan Brewery Co Ltd (No 2) (1976) 3 ACLR 168; Kokotovich Constructions Pty Ltd v Wallington (1995) 13 ACLC 1113; Moran v Moranco Enterprises Pty Ltd (1996) 14 ACLC 1669; Re Onslow Salt Pty Ltd (2003) 45 ACSR 322; and Re Salt Asia Holdings Pty Ltd (2004) 49 ACSR 38. Celtic Capital Pty Ltd v Cityview Corporation Ltd [15.135] Celtic Capital Pty Ltd v Cityview Corporation Ltd [2010] WASC 357 (Supreme Court of Western Australia) 802 [15.110]

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The court considered s 254E in Celtic Capital Pty Ltd v Cityview Corporation Ltd [2010] WASC 357. FACTS: A prospectus was lodged with the ASX. Immediately following the lodgment, HSBC applied for 160,000,000 shares, fulfilling the minimum subscription. The shares were issued and allotted to HSBC on the same day and subsequently sold to the market. The following day, ASIC issued an interim stock order prohibiting the issue, sale or transfer of the securities under this prospectus. Two further orders were issued resulting in the shares not being quoted on the ASX within the time stipulated under ss 723(3), 724(1)(b) and 724(2) of the Corporations Law. DECISION: Despite HSBC having a right of return of the shares under s 724, the shares had been sold multiple times, making HSBC unable to return the shares. Under s 254E of the Corporations Law, the court may issue an order validating the purported issues of shares if the issue is “invalid” for any reason. Master Sanderson considered the previous case law on the issue to determine just how widely “invalid” for any reason should be interpreted. The court found that “invalid” should be read “widely” providing flexibility to the remedial provision (at [21]). Consistent with this approach is confirmation that the grant of validity can operate retrospectively (at [25]). The court made the orders validating the shares to HSBC as it was in the interests of justice and equity to do so.

Share capital Authorised/nominal capital [15.140] In 1998, as part of its reforms of the Corporations Law, the Corporations Law Simplification Taskforce introduced changes to the way share capital was to be defined and managed. The Simplification Taskforce abolished the concept of “authorised capital” or “nominal share capital” because nominal capital became less commercially relevant as companies sought alternative sources of finance. Authorised capital also had little relevance to actual issued capital as a company was not required to issue shares up to its authorised capital limit. The Corporations Law was amended to remove the requirement that a limited liability company must include in their constitution a statement indicating the amount of their authorised share capital.

Par value [15.150] Shares represent a proportionate interest in the net assets of a business. Shares are prescribed a value (see “Valuation of shares” below) which may be based on an issue price, market value or by adopting some other valuation methodology, including net present value (NPV) or net asset backing. The use of a “par value” or nominated value was therefore considered by many in the business and investor community to have little or no commercial relevance. A nominated value has no intrinsic value and does not represent the true net [15.150] 803

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worth of a company. In 1998 the Corporations Law Simplification Taskforce abolished the concept of “par value”. The amendments were incorporated in s 254C which now states that shares of a company have no par value.

Valuation of shares [15.160] Shares may be valued in a number of ways including: • by the issue price – the amount determined by the company as payable for the shares at the time of issue by the company; • by market value – the value the market (whether the ASX or the private market) places on the company and, in turn, on the company’s shares. The market value may, over time, bear little or no relationship to the issue price of the shares; • by calculating the assets of the company, less liabilities, and dividing the balance by the number of shares on issue. This gives the “net asset backing” per share; or • by net present value – a valuation method which requires determining the discounted expected future cash flows of the company, less the initial amount that is outlaid. Expected future cash flows are discounted by a relevant reference rate which can be a general market interest rate or a specific industry interest rate. Once the expected future cash flows are discounted and the initial outlay is taken away a “net present value” is provided and can be used to determine the intrinsic value of the underlying security.

Issue price [15.170] There is no set method for calculating the issue price of shares. Companies use a variety of methods, including the net asset backing per share. The issue price may change over time to reflect changes in the company’s economic fortunes. A company may issue ordinary shares at the price of $1.00 and six months later, issue more ordinary shares for: • a higher price, say $3.00 – if, for example, the market’s perception of the company’s value has increased; or • a lower price, say 50 cents – if the market’s perception of the company’s value has decreased. Shares issued at different issue prices (higher or lower) have the same market value and attract the same rights and benefits as shares previously issued by the company. The person buying shares at a later date simply pays more or less, depending on the company’s economic circumstances, to get the same investment.

Partly paid shares [15.180] Shares may be issued as fully paid or partly paid. Partly paid shares are shares issued on the condition that a shareholder does not have to pay the 804 [15.160]

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full issue price to the company at the time of issue (for example, issued at $2.00, but paid to $1.00). Note s 254M(1): SECTION 254M(1) Liability on partly paid-shares General rule about shareholder’s liability for calls (1)

If shares in a company are partly-paid, the shareholder is liable to pay calls on the shares in accordance with the terms on which the shares are on issue. This subsection does not apply to a no liability company.

Note: The shareholder may also be liable as a contributory under sections 514 – 529 if the company is wound up.

The terms on which partly paid shares are issued usually provide that: • the company can call on the shareholder during the life of the company to make further payments, known as “calls” and members are liable for these payments (except in the case of a no liability company; and • if the company is wound up, except in the case of a no liability company, the shareholder can be called on by the company’s liquidator to contribute the unpaid balance owing on the holder’s shares. Shareholders are also liable as “contributories” (s 9, no liability companies are excluded from this definition) for the unpaid amounts if the company is wound up: ss 514 – 529. However, if the issue price for the shares has been fully paid, the shareholders of a limited liability company cannot be called upon to pay any further calls: s 516.

Issue for consideration other than cash [15.190] Companies may issue shares in exchange for assets. This is particularly common where a promoter forms a new company. The promoter takes shares in return for transferring his or her assets to the company (as occurred in Salomon v Salomon & Co Ltd [1897] AC 22: see [4.30]). The consideration other than cash, however, must be some consideration recognised under contract law. The courts are concerned that the consideration be adequate. This is not a requirement under normal contractual principles. Courts assess whether the consideration for an issue represents money’s worth: see Re White Star Line [1938] 1 All ER 607. To reduce the risk of abuse occurring, it is sensible for directors/promoters to obtain an independent valuation of the assets being sold to the company. If personal valuations are relied on, directors risk personal liability for breaching their directors’ duties: see Chapters 11, 12 and 13 (Yogaratnam).

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Restrictions on share issues General [15.200] Directors are entitled to issue any number of shares in a company without obtaining authorisation from the existing shareholders except in the following circumstances: • where the company’s internal rules limit the number of shares which the directors can issue without shareholder authorisation; • where the proposed share issue would have the effect of varying or cancelling the rights attaching to existing shares; or • where the company is a proprietary company governed by the replaceable rule in s 254D of the Corporations Act or a similar provision in its constitution, that gives existing shareholders a right of pre-emption.

Limitation in internal rules [15.210] A company may impose a ceiling on the total number of shares which the directors are authorised to issue without obtaining shareholder approval. The restriction should be set out in the company’s constitution, along with any other restrictions concerning the exercise of company powers: s 125(1). Where a company has an internal rule of this kind, it operates as follows: • the directors are free to issue shares without shareholder approval up until they reach the maximum limit; and • if they wish to issue shares beyond that limit, they must first seek the approval of existing shareholders.

Varying or cancelling existing share rights [15.220] Directors must follow special procedures when issuing new shares which have the effect of varying or cancelling the rights attaching to existing shares in a company: ss 246B – 246G. If a company has a constitution and the constitution provides the procedure for varying or cancelling class rights, the procedure must be applied: s 246B(1). If there is no constitution or no provision within a company’s constitution, a special resolution of members will ordinarily be required to vary or cancel class rights: s 246B(2). If members in the class do not all agree to the variation of rights, there is provision in the Corporations Act for members who hold at least 10% of the votes in the class that is affected to apply to the court to have the variation set aside: s 246D. A company intending to vary class rights must lodge with ASIC notice and any required resolutions: s 246F. Members can request a copy of any relevant document along with any required resolution varying or cancelling class rights: s 246G. The object of these provisions is to safeguard the interests of existing shareholders. 806 [15.200]

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Right of pre-emption [15.230] A right of pre-emption giving existing shareholders a right of “first refusal” to buy another member’s shares is common in proprietary companies and provided for in the replaceable rule in s 254D. SECTION 254D Pre-emption for existing shareholders on issue of shares in proprietary company (replaceable rule – see section 135) (1)

Before issuing shares of a particular class, the directors of a proprietary company must offer them to the existing holders of shares of that class. As far as practicable, the number of shares offered to each shareholder must be in proportion to the number of shares of that class that they already hold.

(2)

To make the offer, the directors must give the shareholders a statement setting out the terms of the offer, including: (a)

the number of shares offered; and

(b)

the period for which it will remain open.

(3)

The directors may issue any shares not taken up under the offer under subsection (1) as they see fit.

(4)

The company may by resolution passed at a general meeting authorise the directors to make a particular issue of shares without complying with subsection (1).

Section 254D of the Corporations Act is a replaceable rule. A company may, by ordinary resolution passed at a general meeting, authorise the directors to issue the shares without complying with these requirements: s 254D(4).

Share options, rights issues and dividend reinvestment plans [15.240] Companies can increase their share capital in several other ways apart from making a new public issue (float) or making placements of shares to individuals.

Options [15.250] Companies may issue options which allow investors to take up more shares at a later date. Options may be issued at a price or they may be issued free to existing shareholders. There are two main types of options: • call options: options to buy shares at a pre-determined price; and • put options: options to sell shares at a pre-determined price. The price for the option is pre-determined and is derived from the underlying share. A component of the option price includes time value or interest. Options that have a longer time value will have a higher value relative to a short-dated [15.250] 807

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option. The options will specify a date up to which they can be exercised (or dates throughout the year on which they can be exercised). Companies will set the dates to suit their anticipated need for injections of capital. The price at which the options convert to shares will be stipulated or based on a calculation set out in the terms of the option. Option-holders compare the market price of the share with the cost of the option plus the exercise price, and decide whether they will gain on conversion. If the option-holder decides against exercising the option the option will lapse. An alternative for option-holders in listed companies is to sell the options in the market prior to the expiry date. Generally, options are regulated under Ch 7 of the Corporations Act since they ordinarily come within the definition of “derivative” under s 761D. However, there may be occasions when an option may be considered to be an issue of securities/shares and requires a disclosure document under Ch 6D of the Corporations Act, notwithstanding that an issue of options over securities/ shares is not to be taken to be an offer of the underlying securities/shares: s 702.

Rights [15.260] Rights are similar to options but the time limit for exercising them is normally six months. Existing shareholders receive an entitlement to take up more shares at a stipulated price. Their entitlement is proportional to the number of shares they already hold – for example, one right for every four shares. Rights may be issued as renounceable or non-renounceable. Renounceable rights may be sold to others, but non-renounceable ones lapse if they are not taken up by those to whom they were issued.

Dividend reinvestment plans [15.270] Dividend reinvestment plans are a mechanism used commonly by listed companies to build up equity (and also reduce cash outflows). Under the plans, shareholders opt to be issued more shares instead of receiving cash dividends. The amount they would have received goes to pay for the shares which are issued.

Further Reading Austin RP and Ramsay I Ford’s Principles of Corporations Law, 16th ed, LexisNexis, 2014, Ch 17. Chan HW and Brown R “Rights Issues versus Placements in Australia: Regulation or Choice?” (2004) 22 C&SLJ 301 Lipton P, Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, Ch 8 Mannolini J “Brave New World of No Par Value Shares” (1999) 17 C&SLJ 30

808 [15.260]

TOPIC 16 Transactions Affecting Share Capital Principles........................................................................................ Introduction.................................................................................... Doctrine of capital maintenance: Trevor v Whitworth rule .......................... Corporations Act reforms ................................................................... Protection of creditors and shareholders ............................................... Reductions of share capital ................................................................. Exempted reductions of capital ........................................................... Companies acquiring their own shares ................................................. Share buy-backs............................................................................... Financial assistance for purchase of a company’s own shares..................... Failing to comply with Chapter 2J........................................................ Remedies for contravening Chapter 2J ..................................................

[16.10] [16.10] [16.20] [16.40] [16.50] [16.60] [16.220] [16.230] [16.280] [16.450] [16.520] [16.530]

Extract from J Yogaratnam and L Xynas, Corporations Law: In Principle (10th ed, Lawbook Co., 2017), Chapter 18.

Aim At the end of this Topic you should understand the doctrine of capital maintenance and its modern application to: • reductions of a company’s share capital; and • dealings in the company’s own shares.

PRINCIPLES Introduction [16.10] This Topic discusses the legal procedures with which a company limited by shares must comply when undertaking certain transactions affecting its share capital. They are: • reductions of capital; • companies acquiring or controlling their own shares; and • companies giving financial assistance for the purchase of their own shares. Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act) [16.12] Similar to Topic 15, the CATSI Act does not have corresponding provisions in relation to securities as the Corporations Act 2001 (Cth). This is because members of an Aboriginal and Torres Strait Islander corporation are not allowed to issue debentures or other securities.

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Doctrine of capital maintenance: Trevor v Whitworth rule [16.20] The transactions listed above at [16.10] are regulated by Ch 2J of the Corporations Act 2001 (Cth) (Corporations Act). The broad purpose of Ch 2J is to ensure that the interests of creditors and shareholders are protected when companies undertake these transactions. Chapter 2J gives statutory effect to the “doctrine of capital maintenance”, originally established by the general law. That doctrine requires companies limited by shares to maintain their issued share capital in order to protect the interests of the company’s creditors and shareholders. Creditors and shareholders are “entitled to assume that no part of the capital which has been paid into the coffers of the company has been subsequently paid out, except in the legitimate course of its business”: Trevor v Whitworth (1887) 12 App Cas 409 at 423–424 (see below). If the doctrine of capital maintenance was strictly applied, it would prohibit a company from undertaking any of the transactions listed above at [16.10] because they result in a reduction of the company’s share capital. Case study Trevor v Whitworth (1887) 12 App Cas 409 (House of Lords) [16.30] FACTS: A limited liability company was incorporated with paid up capital of £150,000, consisting of 15,000 shares of £10 each. The objects of the company allowed the entity to acquire and carry on a business manufacturing flannels. The memorandum did not authorise the company to purchase back its shares. Instead, two articles provided for the following: Article 179: “Any share may be purchased by the company from any person willing to sell it, and at such price, not exceeding the then marketable value thereof, as the board think reasonable”. Article 181: “Shares so purchased may at the discretion of the board be sold or disposed of by them or be absolutely extinguished, as they deem most advantageous for the company”. The company later went into liquidation. A shareholder sued the company for the outstanding moneys owed to the shareholder as a result of an earlier buy-back of shares by the company. The liquidator, on behalf of the company, submitted that the company was not authorised to buy back the shareholder’s shares, and consequently, did not have to pay the outstanding balance to the shareholder. DECISION: The House of Lords held that a company incorporated under the Companies Act 1862 (UK) had no power to purchase its own shares. The reason for the prohibition, explained by Lord Watson (at 423–424), came to be commonly known as the capital maintenance rule: One of the main objects contemplated by the legislature, in restricting the power of limited companies to reduce the amount of their capital as set forth in the memorandum, is to protect the interests of the outside public who may become their creditors. In my opinion the effect of these statutory restrictions is to prohibit every transaction between a company and a shareholder, by means of which the money already paid to the company in respect of his shares is returned to him, unless 810 [16.20]

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the Court has sanctioned the transaction. Paid-up capital may be diminished or lost in the course of the company’s trading; that is a result which no legislation can prevent; but persons who deal with, and give credit to a limited company, naturally rely upon the fact that the company is trading with a certain amount of capital already paid, as well as upon the responsibility of its members for the capital remaining at call; and they are entitled to assume that no part of the capital which has been paid into the coffers of the company has been subsequently paid out, except in the legitimate course of its business.

Corporations Act reforms [16.40] The strict application of the doctrine of capital maintenance has been gradually modified by reforms to the Corporations Act. However, the rules which still continue to give full effect to the capital maintenance doctrine include: • dividends to be paid only where a three-part test based on net assess, fairness and solvency have been passed (s 254T, Corporations Act); • interests of shareholders and creditors are to be protected (s 256A, Corporations Act); • the general prohibition against a company dealing in its own shares except in limited circumstances (s 259A, Corporations Act); and • any financial assistance provided by the company to a person acquiring shares in the company must not materially prejudice the interests of the shareholders or creditors (s 260A, Corporations Act).

Protection of creditors and shareholders [16.50] Chapter 2J sets out the requirements with which a company must comply when undertaking either a capital reduction, share buy-back or financial assistance transaction. The requirements for each transaction are listed separately, but there are noticeable similarities between the three sets. Broadly, each set of requirements addresses the following concerns: • the risk of the transaction leading to the company’s insolvency; • the fairness and reasonableness of the transaction as between the company’s shareholders; and • the disclosure to shareholders of all information material to the transaction. Compare s 256A, which states the purpose of the capital reduction and share buy-back provisions, with s 260A, which states the conditions under which a company may give financial assistance for the purchase of its own shares.

Reductions of share capital What is a reduction of capital? [16.60] A reduction of capital includes the following transactions: [16.60] 811

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• the cancellation of shares and the repayment of capital by a company to its shareholders; • the reduction of the issue price of shares and the repayment of that capital to shareholders; • the swapping of shares with debentures or other debt instruments (shareholders change status to become creditors); • the cancellation of paid up capital that has been lost or is not represented by available assets (a lost capital reduction: see s 258F); or • the reduction or extinguishment of shareholders’ liability to pay calls on partly paid shares.

Reasons for undertaking a capital reduction [16.70] A company may have a legitimate business purpose for undertaking a share capital reduction including: • to return capital in excess of its needs to its shareholders; • to bring share capital more into line with the net assets of the company; • to bolster earnings per share; and • to exchange equity for debt because it can raise debt finance on more attractive terms. Reductions of share capital may also be undertaken by companies to eliminate a minority member from the share register. Members can be eliminated by cancelling their shares and returning to them their investment in the company. Action of this kind may be taken where the person’s continued membership of the company is having a destabilising effect on the company or to bolster the power of the directors or majority members at the expense of the minority members. Share capital reductions undertaken for such purposes may be subject to legal challenge by the minority shareholders as being oppressive, even where they comply with the procedures in Ch 2J of the Corporations Act.

Regulation of capital reductions [16.80] A company proposing to undertake a reduction of capital (other than those exempted under ss 258A – 258F) must comply with two sets of procedures: • the requirements in ss 256A – 256E; and • any internal rule which restricts or prohibits the exercise of the company’s power to reduce its share capital. If a company has an internal rule which prohibits reductions of capital, the company will be prevented from carrying out a reduction under any circumstances. Alternatively, if the internal rule restricts the circumstances in which a company carries out a capital reduction, the company must comply with those requirements in addition to the requirements in the Corporations 812 [16.70]

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Act: see Re RGC Ltd (1998) 29 ACSR 445; and Westchester Financial Services Pty Ltd v Acclaim Exploration NL (1999) 32 ACSR 499.

Minimum requirements for a capital reduction [16.90] A capital reduction must comply with s 256B(1). SECTION 256B(1) Company may make reduction not otherwise authorised (1)

A company may reduce its share capital in a way that is not otherwise authorised by law if the reduction: (a)

is fair and reasonable to the company’s shareholders as a whole; and

(b)

does not materially prejudice the company’s ability to pay its creditors; and

(c)

is approved by shareholders under section 256C.

A cancellation of a share for no consideration is a reduction of share capital, but paragraph (b) does not apply to this kind of reduction. [Notes to section not extracted]

Protection of shareholders and creditors [16.100] As noted at [16.40], the purpose of this set of requirements is to protect the interests of creditors and shareholders. Section 256B(1)(a) addresses the fairness of the transaction as between the company’s shareholders. Section 256B(1)(b) addresses the risk of the transaction leading to the company’s insolvency. Section 256B(1)(c) requires shareholders to be given the opportunity to vote in favour of or against the reduction after being provided with all the relevant information by the company: s 256C(4).

Capital reduction must be fair and reasonable to shareholders as a whole [16.110] Section 256B(1)(a) involves two important concepts, neither of which is defined within the Corporations Act. A capital reduction must be “fair and reasonable” to “the company’s shareholders as a whole”. Fair and reasonable

[16.120] The Explanatory Memorandum to the Company Law Review Bill 1997 (Cth) in respect of s 256B explained the first concept as follows at [12.24]: “Fair and reasonable” is intended to be a composite requirement. Factors that might be relevant to determining whether a capital reduction is fair and reasonable to shareholders as a whole include the following: (a)

the adequacy of any consideration paid to shareholders [16.120] 813

Business and Corporate Law

(b)

whether the reduction would have the practical effect of depriving some shareholders of their rights (for example, by stripping the company of funds that would otherwise be available for distribution to preference shareholders)

(c)

whether the reduction is being used to effect a takeover and avoid the takeover provisions

(d)

whether the reduction involves an arrangement that should more properly proceed as a scheme of arrangement.

In Re CostaExchange Ltd; Elkington v CostaExchange Ltd [2011] VSC 501 the court considered the notion of what is “fair and reasonable” under s 256B(1)(a). Re CostaExchange Ltd; Elkington v CostaExchange Ltd [16.125] Re CostaExchange Ltd; Elkington v CostaExchange Ltd [2011] VSC 501 (Supreme Court of Victoria) FACTS: A minority shareholder (Mr Elkington) brought an action against CostaExchange, claiming a breach of s 256B(1)(a) and 256D(1) of the Corporations Act. The breach related to a selective reduction in the company share capital and the resulting cancellation of minority shares for a price of $0.86 each. Mr Elkington claimed that $0.86 was an unfair price because it was less than the value formulated on a control basis. An independent expert had concluded that $0.86 each was fair and reasonable to shareholders as a whole, being less than “fair market value on a control basis”, and above “fair market value on a minority basis” (at [1], [30] – [40]). The proposed cancellation of minority shares and a future capital raising program were put and passed at a general meeting of shareholders. A special meeting of minority shareholders also approved the capital reduction. DECISION: Her Honour, Ferguson J considered the meaning of “fair and reasonable” under s 256B of the Corporations Act and referred to the explanatory memorandum which states that “fair and reasonable” intends to be a composite requirement listing factors such as “adequacy of any consideration paid”, if the reduction deprives some shareholders of their rights, if the reduction is used to effect a takeover, avoiding takeover provisions or if the reduction would be more properly be a scheme of arrangement (at [12]). In concluding whether the offer was “fair and reasonable”, her Honour stated (at [59]): however, the phrase “fair and reasonable” conveys one merged concept. In assessing what is fair and reasonable, a wide range of matters relevant to the particular circumstances of the case will need to be taken into account. Value will necessarily be one of the important considerations. However, it is not the sole relevant consideration. In some cases, it may not be the most influential factor. The act considers the interest of all shareholders not just the minority in considering what is fair and reasonable (at [4]). Her Honour also found that the legislation protects “minority shareholders” by providing them with a power of veto. This is to ensure they are protected 814 [16.125]

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from being overborne by the majority. The minority shareholders voted in favour of the selective capital reduction, achieving more than the 75% majority required (at [61]). The selective capital reduction was found to be “fair and reasonable” to the shareholders as a whole. Mr Elkington’s application was dismissed.

Shareholders as a whole

[16.130] The reference in s 256B(1)(a), to “shareholders as a whole”, focuses on the effect of a capital reduction, rather than its purpose. The reduction must be fair and reasonable to shareholders as a collective group, rather than every individual shareholder within the group. It is possible that a reduction may be fair and reasonable to shareholders as a whole but not fair and reasonable for every individual shareholder. However, provided that the reduction is fair and reasonable to shareholders as a whole, it satisfies the test in s 256B(1)(a).

Ability to pay creditors [16.140] Section 256B(1)(b) requires that a capital reduction must not materially prejudice the company’s ability to pay its creditors. There is no definition of “material prejudice” in the Corporations Act. The Explanatory Memorandum to the Company Law Review Bill 1997 (Cth) in respect of s 256B(1) explained at [12.23]: Whether prejudice is “material” will be a question of judgment to be determined in light of all relevant circumstances, including the particular characteristics of the company and the situation of the company’s creditors.

This test of material prejudice focuses on the effect of the reduction on creditors, rather than the purpose for which the company undertook the reduction. The knowledge of the company or its directors is not relevant to compliance with s 256B. For example, it does not matter whether the company or its directors had knowledge of any matters (for example, a lawsuit against the company) which, along with the reduction of capital, would be likely to prejudice the company’s ability to pay its creditors. The court in Re CSR Ltd (2010) 183 FCR 358 considered the issue of “materially prejudice” under s 256B(1)(b). Re CSR Ltd [16.145] Re CSR Ltd (2010) 183 FCR 358 (Federal Court of Australia Full Court) FACTS: CSR proposed at demerger of its sugar and renewable energy businesses to create two listed companies, one being “new CSR”. The demerger would be undertaken through a capital reduction and a scheme of arrangement between CSR and its existing shareholders. CSR has future liabilities with respect to asbestos-related diseases. [16.145] 815

Business and Corporate Law

One issue was whether such a capital reduction materially prejudiced the ability of CSR to pay its creditors? DECISION: At first instance, the trial judge declined to make the orders under s 411 of the Corporations Act for the scheme of arrangement. Her Honour found that because there will be a significant reduction in the capital available to meet future claims for asbestos-related diseases and the lack of certainty, particularly with relation to future claims, of the “actuarial estimates and other expert opinion” that the orders could not be made (at [35] – [36]). On appeal, CSR claimed that their actuarial estimates did not omit future claims et al. In addition, CSR claimed they would be funding future claims from one of its new entities, the new CSR and that the new company would be able to satisfy these liabilities without recourse to asset realisation (at [21]). CSR similarly argued that under s 256B(1)(b) of the Corporations Act a company might be “materially prejudiced” in its ability to pay its creditors if it cannot pay debts from its cash flow and is obliged to sell assets or raise capital (at [39]). The court found that “material prejudice to a company’s ability to pay its creditors as relating to the creation of a material as opposed to a theoretical increase, in the likelihood that the reduction in capital will result in a reduced ability to pay creditors” (at [45]). Further, the court found that that the expert opinion provided did not suggest that there was a reasonable prediction CSR would not be able to pay its creditors (at [46]): None of the evidence adduced, including the evidence of the intervenors experts, suggests that the exercises of projection and assessment proposed on CSR’s behalf are spurious or illusory because the assumptions on which they proceed are too uncertain to afford a sound basis for a conclusion that is not only reasonable but responsible having full regard to the interests of asbestos claimants and other creditors. The Court concluded that the reduction in capital and its associated risk of the non-payment of new CSR’s creditors is theoretical rather than material (at [68]). Orders were made under s 411(1) of the Corporations Act for a meeting of shareholders.

Shareholder approval [16.150] The type of shareholder approval under s 256B(1)(c) of the Corporations Act required depends on whether the reduction is an equal reduction or a selective reduction. Equal reductions

[16.160] An equal reduction is a capital reduction which: • relates only to ordinary shares; 816 [16.150]

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• applies to each holder of ordinary shares in proportion to the number of ordinary shares they hold; and • is on terms that are the same for each holder of ordinary shares: s 256B(2). The reduction must be approved by a resolution passed at a general meeting of the company: s 256C(1). Selective reductions

[16.170] A selective reduction is any capital reduction which is not an equal reduction: s 256B(2). The wording of the definition makes it clear that any reduction of capital involving preference shares or any shares that are not ordinary shares is a selective reduction, regardless of its terms: s 256B(2)(a). A selective reduction must be approved by either: • a special resolution (that is, a 75% majority of those entitled to vote) passed at a general meeting of the company (s 256C(2)(a)); or • a resolution passed by all ordinary shareholders (not just all those present at the meeting or voting by proxy) at a general meeting: s 256C(2)(b). Where the special resolution procedure is adopted, no person who will receive consideration as part of the capital reduction, or whose liability to pay any amount unpaid on shares will be reduced, may cast a vote in favour of the resolution: see Re Tiger Investment Co Ltd (1999) 158 FLR 321; and Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2001) 166 FLR 144. Where the reduction involves the cancellation of shares, it must also be approved by a special resolution of the shareholders whose shares are to be cancelled: s 256C(2); and see Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2001) 166 FLR 144. Case study Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2001) 166 FLR 144 (NSW Court of Appeal)

[16.180] FACTS: (Winpar) held 12,373 ordinary shares in Goldfields Kalgoorlie Ltd (GKL) which represented approximately 0.05% of the total of 244,382,133 shares that had been issued by GKL. Almost 88% of the total share capital in GKL was concentrated in a few related companies and subsidiaries of GKL. The remaining capital was held by non-related companies. In June 2000, GKL gave notice to its members of an extraordinary general meeting (EGM) to consider a proposed selective reduction of its share capital. The proposal involved the cancellation of the shares of the non-related shareholders, including Winpar, in return for a payment to the shareholders of 55 cents per share. The EGM was held later in June where resolutions were passed by the members at the meeting. Winpar voted against the resolutions and challenged the validity of the selective buy-back. DECISION: At first instance, Santow J dismissed Winpar’s application that the selective buy-back had breached ss 256B and 256C of the Corporations Act.

[16.180] 817

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On appeal, the New South Wales Court of Appeal held that GKL had complied with ss 256B and 257C of the Corporations Act. According to the Court of Appeal, the selective buy-back was fair and reasonable to all shareholders. The non-related shareholders were to receive a payment of 55 cents per share which was considered to be fair and reasonable payment in consideration of the value of their shares. Further, the selective buy-back would reduce operating costs at head office and this, in turn, would provide a benefit to all shareholders, as required by s 256B(1)(a). The EGM was properly convened and approval for the selective buy-back had been sought and obtained by GKL at the meeting of all members, including the members whose shares were the subject of the buy-back: ss 256B(1)(c) and 275C. Practical matters

[16.190] • Both shareholders and ASIC must be given notice of the meeting(s) at which a resolution required by s 256C is to be voted on. • The company must provide a statement to shareholders (and lodge a copy with ASIC) containing all the information which it believes is material to their decision on how to vote on the resolutions: s 256C(4) – (5); and see Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2001) 166 FLR 144. • The company must lodge a copy of the special resolution with ASIC within 14 days after it is passed: s 256C(3). • The reduction has legal effect (meaning the company is allowed to make the reduction) 14 days following this lodgment: 256C(3). [16.200] Table 16.1: Summary of Procedures for Capital Reductions Procedures for capital reductions

Ordinary resolution s 256C(1) Special/unanimous resolution s 256C(2)

Selective reduction 1. Fair and reasonable to shareholders as whole 2. Not materially prejudicial to creditors 3. Approved by shareholders yes – – yes

Disclose all relevant information s 256C(4)

yes

yes

Lodge documents with ASIC s 256C(5) Period of notice of meeting to shareholders s 249H – 249HA

yes

yes

Reduction requirements • s 256B • Requirements (if any) in internal rules

Notify resolutions to ASIC s 256C(3) Date when reduction can be made s 256C(3)

818 [16.190]

Equal reduction

(a) proprietary company: 21 days (b) listed company: 28 days yes yes 14 days after lodgment of resolutions with ASIC

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Other relevant legislation [16.210] Section 256E contains a very important table listing other provisions which are applicable to capital reductions. This table shows how the Corporations Act as a whole tries to achieve compliance. Under these linking provisions, directors who engage in reductions of capital which cause the company to become insolvent may be personally liable under ss 588G and 1317H. Other relevant provisions such as those concerning related party transactions and continuous disclosure are also expressly linked to reductions of capital by s 256E.

Exempted reductions of capital [16.220] Sections 258A – 258F authorise some other capital reductions which may take place without the need to comply with s 256B. For example: • capital reductions by unlimited companies (the position of creditors is not prejudiced because the members are personally liable if the company cannot pay its debts) (s 258A); • capital reductions resulting from the cancellation of forfeited shares provided that they were forfeited pursuant to the terms of the share issue (s 258D); • a redemption of redeemable preference shares funded from the proceeds of a new issue of shares made for the purposes of the redemption (s 258E(1)(a)); • a share buy-back under ss 257A – 257J, if the shares are paid for out of share capital (s 258E(1)(b), Corporations Act); • capital reductions involving the cancellation of shares in the context of a takeover (s 258E(2)); • capital reductions ordered by the court under s 1325A because of contravention of the takeover or compulsory acquisition provisions (s 258E(3)); and • a lost capital reduction – the reduction of capital that is lost or not represented by the available assets of the company: s 258F.

Companies acquiring their own shares General prohibition [16.230] Companies are generally prohibited from directly acquiring their own shares (also called “self-acquisition”) except in the special circumstances set out in s 259A. SECTION 259A Directly acquiring own shares A company must not acquire shares (or units of shares) in itself except: (a)

in buying back shares under section 257A; or [16.230] 819

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(b)

in acquiring an interest (other than a legal interest) in fully-paid shares in the company if no consideration is given for the acquisition by the company or an entity it controls; or

(c)

under a court order; or

(d)

in circumstances covered by subsection 259B(2) or (3).

The Corporations Act also prevents a company from indirectly acquiring its own shares either by: • taking security over shares in itself except as permitted by s 259B; • issuing or transferring shares in itself to an entity it controls (s 259E defines control for these purposes) (s 259C); or • obtaining or increasing control over an entity which holds shares in the company: s 259D.

Reason for prohibition [16.240] The purchase by a company of its own shares contravenes the doctrine of capital maintenance because the transaction reduces the share capital available to creditors and shareholders: Trevor v Whitworth (1887) 12 App Cas 409. If there was no prohibition on companies buying their capital, then it would be possible for a company to continue to reduce the company’s cash account. Companies that are in financial difficulty could use a buy-back to affect the redistribution of cash and other assets to shareholders, thus putting into jeopardy the company’s ability to pay back its creditors. Sections 259A – 259D preserve this doctrine by prohibiting companies from acquiring their own shares directly or indirectly, except as permitted by s 259A. The object of ss 259A – 259D is to prevent a company from purchasing its own shares for non-legitimate purposes, such as to: • manipulate the price of the company’s shares to the detriment of investors; • stall or frustrate a takeover bid by an existing shareholder; • assist the board of directors or a group of shareholders to consolidate their control of the company and act in their own interests, rather than the interests of all shareholders; • buy out some shareholders at the expense of other shareholders willing to sell their shares; and • save shareholders’ investment in the company in the event of corporate insolvency by buying them out before the company is wound up, leaving a smaller pool of funds to satisfy creditors’ claims.

820 [16.240]

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Exceptions to the general prohibition [16.250] Section 259A allows a company to purchase its own shares in four situations: • s 259A(a) allows share buy-backs; • s 259A(b) allows the acquisition of an interest in fully paid shares (other than a legal interest) if no consideration is given for it by either the company or an entity it controls; • s 259A(c) concerns situations where a company is required to purchase shares by a court order, for example, under Pt 2F.1; and • s 259A(d) concerns situations where a company takes security over its shares under an employee share scheme. It also applies when the company is a financial institution and it takes security over its shares as part of its ordinary course of business of providing loan finance.

Indirect self-acquisition by taking security over its own shares [16.260] A company may indirectly acquire shares in itself by exercising its rights under a security permitted by s 259B(2) or (3). Where a company acquires shares pursuant to a security, it must dispose of those shares within 12 months of acquiring them: s 259B(4). It must not exercise any voting rights attaching to the shares during the period it holds the shares: s 259B(5).

Other indirect self-acquisitions [16.270] Section 259C provides that an issue or transfer of shares by a company to an entity controlled by the company is void except in the circumstances set out in the section. For these purposes, control is defined as the capacity to determine the outcome of decisions about the entity’s financial and operation policies: s 259E; see also Topic 9 at [9.960]. The entity could be a natural person, another company, a partnership or a trust: s 64A. Where a company obtains control of an entity which holds shares in the company, within 12 months after this occurs, it must either cease to control the entity or the entity must cease to hold shares in the company: s 259D(1). The entity must not exercise any voting rights attaching to the shares in the company during the 12-month period: s 259D(3). The Corporations Act imposes heavy penalties for any breach of s 259D.

Share buy-backs What is a share buy-back? [16.280] A share buy-back is any transaction by which a company buys back its own shares from existing shareholders. The transaction involves an agreement between the company and the selling shareholders to transfer shares to the company in return for consideration provided by the company. [16.280] 821

Business and Corporate Law

Regulation of share buy-backs: ss 257A–257J [16.290] Share buy-backs are regulated by ss 257A – 257J of the Corporations Act. They are one of the main exceptions to the prohibition against companies buying their own shares. It is important to note however that these statutory rights that a company has under the Corporations Act to buy back their own shares can be put aside or restricted by the company’s own constitution: s 257A, Corporations Act.

Relationship between a buy-back and a capital reduction [16.300] A share buy-back also results in a reduction of share capital, but share buy-backs are not governed by the requirements applying to direct reductions of capital: ss 256A – 256E. A separate set of requirements applies for share buy-backs: ss 257A – 257J. Most requirements for a share buy-back are similar to the requirements for capital reductions. The major practical difference is that a share buy-back can only take place with the consent of the shareholders whose shares are being bought back. Shareholders are not compelled to agree to sell their shares back to the company. By contrast, a capital reduction can take place without requiring the consent of the shareholders whose capital is being returned, provided that it complies with the set of statutory requirements applying to capital reductions.

Requirements for a buy-back [16.310] The minimum requirements for a buy-back are very similar to those for a reduction of capital. Note s 257A: SECTION 257A The company’s power to buy back its own shares A company may buy back its own shares if: (a)

the buy-back does not materially prejudice the company’s ability to pay its creditors; and

(b)

the company follows the procedures laid down in this Division.

Note 1: If a company has a constitution, it may include provisions in the constitution that preclude the company buying back its own shares or impose restrictions on the exercise of the company’s power to buy back its own shares. Note 2: A company may buy-back redeemable preference shares and may do so on terms other than the terms on which they could be redeemed. For the redemption of redeemable preference shares, see sections 254J-254L.

Protection of creditors and shareholders [16.320] As with capital reductions, the purpose of these requirements is to protect the interests of creditors and the remaining shareholders (those 822 [16.290]

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shareholders whose shares are not being bought back by the company): s 256A. The shareholders whose shares are being bought are protected by the fact that they must agree to the share buy-back before it can take place. Section 257A(a) addresses the risk of the buy-back transaction leading to the company’s insolvency. The same requirement applies to share capital reductions. The procedures in ss 257B – 257J address the issue of fairness between the company’s shareholders and require the company to provide relevant information about the transaction to the shareholders. The extent of the information that must be provided to shareholders varies, depending on the type of buy-back.

Reasons for undertaking a buy-back [16.330] A company may wish to buy back its own shares for the same business reasons that it undertakes a share capital reduction, as well as: • to reduce administrative costs by buying out the holders of odd lots of shares; • to enable employees to realise shares acquired under an employee share scheme when they leave the company; and • to enable a retiring shareholder to be bought out of a company. Share buy-backs provide another way, in addition to reductions of capital, that a company can eliminate minority members. However, with a buy-back, the minority whose shares are being bought back must consent.

Types of permitted buy-backs [16.340] The Corporations Act permits five types of share buy-back: • equal access buy-backs; • on-market buy-backs; • employee share scheme buy-backs; • minimum holding buy-backs; and • selective buy-backs.

Equal access buy-backs [16.350] Equal access share buy-backs are similar to equal capital reductions. They are buy-backs which satisfy the following conditions: (a)

the offers under the scheme relate only to ordinary shares;

(b)

the offers are made to every ordinary shareholder to buy back the same percentage of their ordinary shares;

(c)

all of the ordinary shareholders have a reasonable opportunity to accept the offers made to them; and

(d)

the terms of the offers are the same: s 257B(2). [16.350] 823

Business and Corporate Law

On-market buy-backs [16.360] On-market buy-backs are buy-backs of listed shares on the stock exchange, either in Australia or in a financial market outside Australia approved by ASIC: s 257B(6) – (7).

Employee share scheme buy-back [16.370] Employee share scheme buy-backs are buy-backs under a scheme for the acquisition of shares in a company by or on behalf of the employees or directors of the company, which has been approved by the company in general meeting: s 9. The buy-backs usually occur when employees cease employment with the company.

Minimum holding buy-backs [16.380] Minimum holding buy-backs permit a listed company to buy back parcels of shares which are smaller than a marketable parcel of shares under the trading rules of the relevant financial market: s 9. The Corporations Act requires any company using this scheme to buy back all of the shareholder’s shares in the company.

Selective buy-backs [16.390] These are defined as buy-backs not included in the other four types: s 9. Generally, they will be buy-back offers made to particular shareholders (or groups), or to holders of other than ordinary shares (for example, preference shares).

Procedure for buy-backs [16.400] Section 257B(1) is in the form of a table which sets out the requirements for each type of buy-back. With the exception of a minimum holding buy-back, each of the schemes requires the company undertaking a buy-back to give notice to ASIC of its intention to carry out a buy-back. The normal maximum size limit for buy-backs is 10% of the shares within 12 months. This is referred to as the “10/12 limit”: s 257B(4). The 10/12 limit may be exceeded under certain conditions. [16.410] Table 16.2: Procedures for share buy-backs – s 257B procedures

ordinary resolution s 257C 824 [16.360]

minimum holding

–

employee share scheme Within Over 10/12 10/12 limit limit – yes

on-market Within10/12 limit –

equal access scheme Over10/12 Within Over limit 10/12 10/12 limit limit yes – yes

selective buyback –

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Transactions Affecting Share Capital

procedures

special/ unanimous resolution s 257D lodge offer documents with ASIC s 257E 14 days’ notice s 257F disclose relevant information when offer made s 257G cancel shares s 257H notify cancellation to ASIC s 254Y

minimum holding

–

employee share scheme Within Over 10/12 10/12 limit limit – –

on-market Within10/12 limit –

equal access scheme Over10/12 Within Over limit 10/12 10/12 limit limit – – –

selective buyback yes

–

–

–

–

–

yes

yes

yes

–

yes

yes

yes

yes

yes

yes

yes

–

–

–

–

–

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

Once the shares are bought back under any buy-back scheme, they must be cancelled: s 257H. The company must notify ASIC of the shares which have been bought back and cancelled: s 254Y. On-market buy-backs must also comply with the procedures in ASX Listing Rules 7.29–7.35, which broadly require companies to keep the ASX informed about such transactions.

Equal access schemes: section 257C [16.420] No shareholder approval is needed for an equal access scheme buy-back unless the 10/12 limit is exceeded. If the 10/12 limit is exceeded, the following steps must be taken: • prior approval of the terms of the buy-back agreement by ordinary resolution of the general meeting or the agreement must be conditional on the approval of the meeting; • the company must include a statement setting out all information known to the company which is material to the decision on how to vote on the resolution with the notice of the meeting; and • notice of the meeting, together with any relevant documents, must be lodged with ASIC before being sent to shareholders: ss 257C, 257F.

Selective buy-backs: section 257D [16.430] Because only some shareholders are being given the opportunity to sell their shares back to the company (if they wish to do so) stricter procedural requirements apply to selective buy-backs. These schemes require: [16.430] 825

Business and Corporate Law

• approval by special resolution of the members, with no votes being cast by selling shareholders, or unanimous approval by all ordinary shareholders at a general meeting; and • the same notification and disclosure requirements as for equal access schemes: ss 257D, 257F.

Other relevant legislation [16.440] Section 257J contains an important table which lists other provisions in the Corporations Act applicable to buy-backs (compare the similar table in s 256E).

Financial assistance for purchase of a company's own shares General restriction [16.450] As a matter of principle, purchasers should pay for shares they buy from their own resources: see Darvall v North Sydney Brick & Tile Co Ltd (1989) 15 ACLR 230 at 257 per Kirby P. If a company lends money or provides other financial assistance for the purchase of its shares it may also breach the doctrine of capital maintenance. If, for example, the borrower cannot repay the loan, the effect is that the company has bought, or helped to buy, its own shares. To protect creditors and shareholders, s 260A permits a company to give financial assistance to a person to acquire its shares, but only under regulated conditions. SECTION 260A(1), (2) Financial assistance by a company for acquiring shares in the company or a holding company (1)

A company may financially assist a person to acquire shares (or units of shares) in the company or a holding company of the company only if: (a)

(2)

(i)

the interests of the company or its shareholders; or

(ii)

the company’s ability to pay its creditors; or

(b)

the assistance is approved by shareholders under section 260B (that section also requires advance notice to ASIC); or

(c)

the assistance is exempted under section 260C.

Without limiting subsection (1), financial assistance may: (a)

826 [16.440]

giving the assistance does not materially prejudice:

be given before or after the acquisition of shares (or units of shares); and

Transactions Affecting Share Capital

(b)

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take the form of paying a dividend.

Protection of creditors and shareholders [16.460] Section 260A(1)(a)(i) addresses the issue of the fairness of the financial assistance transaction from the viewpoint of the company and its shareholders. Section 260A(1)(a)(ii) addresses the risk of financial assistance leading to the company’s insolvency from the viewpoint of its creditors. The issues addressed by these provisions are similar to those addressed by the requirements for capital reductions and buy-backs.

What is financial assistance? [16.470] The Corporations Act does not define what is meant by the concept of financial assistance, other than noting that it may be given before or after the acquisition of shares and may take the form of paying a dividend: s 260A(2). In the absence of a statutory definition, case law provides many examples of financial assistance, including: • the making of a loan – DJE Constructions Pty Ltd v Maddocks [1982] 1 NSWLR 5; ASIC v Adler (2002) 168 FLR 253 (largely affirmed on appeal Adler v ASIC (2003) 179 FLR 1); • issuing a debenture – Victor Battery Co Ltd v Curry’s Ltd [1946] Ch 242; • giving security over company assets – Firmin v Gray & Co Pty Ltd [1985] 1 Qd R 160; and • incurring a personal obligation on behalf of another – Burton v Palmer [1980] 2 NSWLR 878. See other examples of “financial assistance” in Belmont Finance Corp Ltd v Williams Furniture Ltd (No 2) [1980] 1 All ER 393 and E H Dey Pty Ltd (in liq) v Dey [1966] VR 464. The cases indicate that courts have adopted a practical and realistic approach in deciding whether a transaction involves a company giving financial assistance: see Dempster v National Companies & Securities Commission (1993) 9 WAR 215; Milburn v Pivot Ltd (1997) 78 FCR 472; Tallglen Pty Ltd v Optus Communications Pty Ltd (1998) 146 FLR 380; Wambo Mining Corp Pty Ltd v Wall Street (Holding) Pty Ltd (1998) 16 ACLC 1601.

“Material prejudice” [16.480] Section 260A(1)(a) permits a company to give financial assistance provided that the assistance does not materially prejudice either the company, its shareholders or the company’s ability to pay its creditors. The object of this provision is to enable companies to undertake normal commercial transactions which do not prejudice the company’s financial position. The requirement of [16.480] 827

Business and Corporate Law

no material prejudice is similar to the “no material prejudice” requirements for share capital reductions and share buy-backs. The effect of the transaction on the company and its shareholders should be assessed separately, because the company is an entity separate from its shareholders. It is possible that there will be circumstances where giving financial assistance will materially prejudice the company, but not its shareholders. In those circumstances, the company could not give financial assistance relying on s 260A(1)(a). Instead, it would have to get approval from the shareholders under s 260B. It appears that before the act of giving financial assistance can be held to cause “material prejudice”, the financial assistance must have diminished the company’s resources in some way: see Tallglen Pty Ltd v Optus Communications Pty Ltd (1998) 146 FLR 380; and Wambo Mining Corp Pty Ltd v Wall Street (Holding) Pty Ltd (1998) 16 ACLC 1601. In ASIC v Adler (2002) 168 FLR 253 at [335]-[355], Santow J adopted this “impoverishment” doctrine. The judge said it was necessary to take a commercial approach and look at the whole transaction to determine whether or not it had diminished the company’s resources. In this case, HIHC had handed over $10 million in cash in return for an interest in units in a unit trust and, as Santow J said (at [355]), these rights were “from the start of materially lesser value than the cash handed over”. This transaction eventually resulted in an actual loss of over $2 million to HIHC as well as loss of use of a further almost $4 million that could have been used for other investments or for business purposes.

Shareholder approval procedure [16.490] Section 260A(1)(b) permits a company to give financial assistance even if this would materially prejudice the interests of the company or its ability to pay its creditors, provided that the assistance is approved by shareholders pursuant to s 260B. The procedure for obtaining approval is very similar to the shareholder approval procedures for selective share capital reductions and selective share buy-backs.

Financial assistance exemptions [16.500] Section 260C exempts financial assistance given by a company in the ordinary course of commercial dealing or if its ordinary business includes money lending and the assistance is given in the ordinary course of that business.

828 [16.490]

Transactions Affecting Share Capital

| TOPIC 16

Figure 16.1: Summary of transactions affecting share capital

Failing to comply with Chapter 2J [16.520] The legal consequences of failing to comply with Ch 2J are the same for each transaction discussed in this Topic. Civil penalty sanctions apply to breaches of the capital reduction rules (s 256D), the share buy-back rules (s 257J), the self-acquisition rules (s 259F) and the financial assistance rules (s 260D) in Ch 2J. Companies are specifically excluded from liability as they are the “victims” of the contraventions. Officers involved in the contravention are subject to the civil penalty provisions. They can be liable for a pecuniary penalty of up to $200,000 in respect of each breach or an order banning them from managing a company, as well as liability for breaches of general directors’ duties: s 260E. They can also be liable to pay compensation to the company: s 1317H. In ASIC v Adler (2002) 168 FLR 253 Santow J made orders: [16.520] 829

Business and Corporate Law

• banning Adler and Williams from managing a company for 20 and 10 years, respectively; • imposing substantial pecuniary penalties on Adler ($450,000), Adler Corporation ($450,000), Williams ($250,000) and Fodera ($5,000); and • requiring Adler, Williams and Adler Corporation to pay total compensation of $7,986,402 to HIHC. (The amount of compensation was varied by the Court of Appeal, but the other penalties were unchanged: see Adler v ASIC (2003) 179 FLR 1.) Any transaction undertaken in contravention of Ch 2J remains legally valid and enforceable despite the fact that it contravenes the Corporations Act.

Remedies for contravening Chapter 2J [16.530] Shareholders and creditors can apply to the court for an injunction to restrain a company from undertaking a share capital transaction in contravention of the procedural requirements in Ch 2J of the Corporations Act: s 1324 (see discussion of s 1324 in Chapter 14 (Yogaratnam)). Injunctions are a useful remedy for stopping an improper share capital transaction before it is completed. Once completed, an injunction is no longer an appropriate remedy because the transaction is taken to be valid and effective. Shareholders can resort instead to members’ remedies, such as under Pt 2F.1. Creditors may have rights under ss 588G – 588Z of the Corporations Act.

Further Reading Alevras S and du Plessis J, “The payment of dividends: Legal confusion, complexities and the need for comprehensive reform in Australia” (2014) 32 Company and Securities Law Journal 312 Austin RP and Ramsay I Ford’s Principles of Corporations Law, 16th ed, LexisNexis, 2014, Ch 24. Brown CA and Efthim K “The Effect of Taxation on Equal Access Buybacks in Australia” (2005) 5 International Review of Finance 199 Brown CA “The Forensics of Share Buybacks” (2004) JASSA (Summer) 30 Cho YY and Kshore V “The “Material Prejudice” Test and the Financial Assistance Prohibition” (2004) 78 ALJ 194 Lipton P, Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, [8.200]-[8.375] Mitchell JD, Dharmawan GV and Clarke AW “Management’s Views on Share Buy-Backs: An Australian Survey” (2001) 41 Accounting and Finance 93 Ramsay I and Lamba AS Share Buy-backs: An Empirical Investigation Research Report, Centre for Corporate Law and Securities Regulation, The University of Melbourne, 2000

830 [16.530]

TOPIC 17 Loan Capital Principles........................................................................................ Introduction.................................................................................... Authority to borrow money................................................................ Debt vs equity ................................................................................. Debentures ..................................................................................... Trustee for debenture-holders ............................................................. Personal property securities ................................................................ What is a security interest? ................................................................. Registration of security interests .......................................................... Subordinate debt .............................................................................

[17.10] [17.10] [17.20] [17.30] [17.50] [17.100] [17.120] [17.170] [17.180] [17.230]

Extract from J Yogaratnam and L Xynas, Corporations Law: In Principle (10th ed, Lawbook Co., 2017), Chapter 20.

Recent Developments Corporations Act Amendments (Commonwealth) Personal Property Securities Act 2009 Personal Property Securities (Corporations and Other Amendments) Act 2010 Personal Property Securities (Corporations and Other Amendments) Act 2011 Australian Government, Whittaker B, Review of the Personal Property Securities Act 2009, Final Report (2015) (The Whittaker Report)

Aim At the end of this Topic you should know: • the distinction between share capital and loan capital; • the meaning of “debenture” and the conditions under which a company may borrow money from the public; • how personal property securities are now regulated; • what is a “security interest” over a company’s property; • the difference between a a circulating and non-circulating security interest; and • why security interests over company property should be registered.

831

Business and Corporate Law

PRINCIPLES Introduction [17.10] This Topic discusses how the Corporations Act 2001 (Cth) (Corporations Act) regulates the relationship between a company and suppliers of loan capital to the company. It is one of many relationships in which a company plays the role of debtor. Others include the company’s relationship with its bank (for overdraft facilities supplied to the company), employees (for unpaid wages) and trade creditors (for goods and services supplied to the corporation on credit). Creditors lending money or extending credit to a company may require the company to provide security for their loans. Creditors who take security have a proprietary right over one or more assets of the borrower which, in the event of default, enables them to seize those assets and sell them to recover any amounts outstanding on their loans. Unsecured creditors can only sue for the debt – they have no rights over particular assets. This and many other aspects of transactions between a creditor and a corporate debtor are no different to transactions between creditors and individual debtors. Apart from the issues discussed here, the laws regulating creditor–debtor relations are outside the realm of corporate law. The Corporations Act as amended by the Personal Property Securities Act 2009 (Cth) (PPS Act) (as amended) regulates loans to companies in the form of debentures and unsecured notes and security given by a company for a loan over a circulating or non-circulating asset. The PPS Act commenced on 30 January 2012 and the transitional period (by which time all PPS Act security interests must be perfected) ended on 31 January 2014. Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act) [17.12] There are no corresponding provisions in relation to loan capital in the CATSI Act because such corporations are not allowed to issue debentures or other securities.

Authority to borrow money [17.20] Companies have the power to borrow money: s 124(1). Where a company has a constitution, the constitution may include provisions which otherwise restrict the borrowing powers given to the company by the Corporations Act. Despite such restrictions, the Corporations Act permits creditors to make a number of assumptions about the company’s authority to incur debt and give security for loans. Public companies may borrow money from the public provided they comply with the disclosure requirements in the Corporations Act.

832 [17.10]

| TOPIC 17

Loan Capital

Debt vs equity [17.30] Finance obtained from lenders (for example, a bank overdraft or a loan) is known as debt finance or “loan capital”. Capital provided by shareholders is known as “equity capital”. Gearing is the ratio of funds borrowed by a company compared to the share capital. If loan capital is large compared to equity capital, the gearing is said to be high. If borrowing is low, the gearing is said to be low. As a rule, the higher the gearing, the greater the risk for investors. However, there may be occasions where certain financial instruments are not easily characterised as belonging either to debt or equity. Hybrid financial instruments may have dual characteristics of debt and equity, making assessments concerning gearing difficult to evaluate. In a recent decision, St George Ltd v Commissioner of Taxation [2008] FCA 453, the Federal Court came across the difficult task of characterising subordinate debentures as either debt or equity for tax purposes. The Court held that subordinate debentures used by St George Bank to finance a merger with Advance Bank Australia were properly characterised as equity capital and not debt. The Court further held that since the debentures were not debt, any interest paid by St George was not an allowable deduction under Australian tax law. The following table summarises legal factors which may influence a company when deciding whether to raise funds in the form of loan capital or equity capital. [17.40] Table 17.1: Choosing between equity and loan capital Factors Legal capacity of person providing money

Return on investment

Amount of return

Deductibility of company expenses involved in raising capital Deductibility of payments made by company to person providing money Effect of liquidation of company

Loan Capital Becomes a creditor, with limited rights under Corporations Act unless company becomes insolvent (may also be a shareholder in company) Creditors are entitled to repayment of principal plus interest, whether or not company is making profits Usually a fixed rate of interest, which becomes a debt due on maturity

Tax deductible

Equity Capital Becomes a shareholder with membership rights, eg, right to vote and access to legal remedies under Pt 2F.1

Shareholders’ dividends not automatic. Must be determined or declared and paid from profits Dividend payable on ordinary shares is determined by the directors. It only becomes enforceable as a debt when the time for payment has arrived Not tax deductible

Interest is tax deductible

Dividends are not tax deductible

Creditors’ claims must be met before repayment of equity capital

Shareholder’s equity only repaid from any surplus left after payment of creditors’ claims

[17.40] 833

Business and Corporate Law

Debentures Statutory definition [17.50] A “debenture” was traditionally thought of as a document under which a company acknowledges that it has borrowed money for some length of time. At common law a debenture was defined as a document that is issued by a corporation which acknowledges that a debt is owed by that corporation: Edmonds v Blaina Furnaces Co (1887) 36 Ch D 215. The definition of debenture for the purposes of the Corporations Act is in broader terms. SECTION 9 (ABRIDGED) Dictionary “debenture” of a body means a chose in action that includes an undertaking by the body to repay as a debt money deposited with or lent to the body. The chose in action may (but need not) include a charge over property of the body to secure repayment of the money. However, a debenture does not include: (a)

(b)

an undertaking to repay money deposited with or lent to the body by a person if: (i)

the person deposits or lends the money in the ordinary course of a business carried on by the person; and

(ii)

the body receives the money in the ordinary course of carrying on a business that neither comprises nor forms part of a business of borrowing money and providing finance; or

an undertaking by an Australian ADI to repay money deposited with it, or lent to it, in the ordinary course of its banking business; or Note: This paragraph has an extended meaning in relation to Chapter 8 (see subsection 1200A(2)).

(c)

an undertaking to pay money under: (i)

a cheque; or

(ii)

an order for the payment of money; or

(iii)

a bill of exchange; or

(e)

an undertaking by a body corporate to pay money to a related body corporate; or

(f)

an undertaking to repay money that is prescribed by the regulations.

834 [17.50]

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| TOPIC 17

For the purposes of this definition, if a chose in action that includes an undertaking by a body to pay money as a debt is offered as consideration for the acquisition of securities under an off-market takeover bid, or is issued under a compromise of arrangement under Part 5.1, the undertaking is taken to be an undertaking to repay as a debt money deposited with or lent to the body.

Under the Corporations Act, a debenture is any promise made by the corporation to repay money that has been provided to it for the purposes of financing its operations. As a “chose in action”, a debenture represents a legal right against the corporation. See s 9, Corporations Act. One of the reasons for the introduction of this definition was to facilitate electronic trade in debentures. The definition in s 9 includes (but need not) a security interest over property of the body to secure repayment of the money. There are a number of exclusions to the definition which are intended to ensure that these provisions do not unnecessarily complicate normal business transactions. The exclusions include: • an undertaking by an Australian ADI to repay money deposited with it, or lent to it, in the ordinary course of its banking business; or • an undertaking to repay money deposited with or lent to the body by a person if: (i)

the person deposits or lends the money in the ordinary course of a business carried on by the person; and

(ii)

the body receives the money in the ordinary course of carrying on a business that neither comprises nor forms part of a business of borrowing money and providing finance; or

• undertakings to pay money under a cheque or an order for the payment of money or bill of exchange; or • an undertaking by a body corporate to pay money to a related body corporate; or • an undertaking to repay money that is prescribed by the regulations. A debenture may be issued to one person or be one of a series of debentures issued to a large number of persons.

Public offerings [17.60] A public company can raise loan finance from the investing public by way of debentures. The usual method is for a company to offer to the public a set of debentures, called debenture stock. The holders of the debentures become creditors of the company for a particular sum of money, being part of the total sum owing in respect of the debenture stock. Such issues will [17.60] 835

Business and Corporate Law

normally require a disclosure document. Debentures may be redeemed according to the terms of issue and also traded like shares. Companies must keep a register of debenture-holders: s 168.

Description of debentures [17.70] Even though the definition of “debentures” (s 9) covers both secured and unsecured loans, the public perception of a debenture has traditionally been a secured rather than an unsecured loan. The rules in s 283BH ensure investors are not misled by restricting the way in which debentures can be described in: • any disclosure made in relation to the offer of debentures; • any documents relating to the offer; or • the debentures themselves: s 283BH(1); to ensure that the term is only used to describe loans that are adequately secured. The best security is that provided by a mortgage debenture. This is defined as a debenture secured by a registered or registrable first mortgage given to the trustee (for debenture-holders) over land, where the amount borrowed is not more than 60% of the land value according to a qualified valuer: s 283BH(2). A debenture is defined as a debenture secured by a charge in favour of the trustee over the whole or any part of the tangible property of the company, where that property is sufficient and reasonably likely to be sufficient to meet the liability to repay the loan: s 283BH(3). If these requirements are not satisfied – namely, if the lender is not given adequate security, the terms unsecured note or unsecured deposit note must be used: s 283BH(1). The net effect of s 283BH is to prevent a company from being able to use the term “debenture” unless the company has provided adequate security for the loan.

Reason for distinctions [17.80] The Corporations Act distinguishes between mortgage debentures, debentures and unsecured notes because of the different risks which arise for the holders of the three forms of debenture. A mortgage debenture affords the highest degree of protection for holders because it is secured by land which has been professionally valued. A debenture ranks next as it is secured by sufficient tangible assets. Holders of unsecured notes take the greatest risk. They can only sue the company for the debt owing under their contract. They have no proprietary remedy or other means of claiming directly against the company’s assets.

836 [17.70]

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| TOPIC 17

Conversion to shares [17.90] A company may also issue debentures or notes which allow the holder to convert these into shares at a later date. They are known as convertible debentures or convertible notes. (Compare these with converting preference shares discussed in Chapter 17 (Yogaratnam).)

Trustee for debenture-holders [17.100] As it would be impossible for all lenders to supervise their investment personally, the Corporations Act provides that, before a borrowing corporation offers debentures to the public, a trustee must be appointed who acts for and on behalf of the many debenture-holders pursuant to the terms of a trust deed: s 283AA. Only an entity listed in s 283AC(1) – such as the Public Trustee or an authorised trustee company – is eligible to be a trustee, provided that the appointment will not result in any conflict of interest or duty: s 283AC(2). A breach of these provisions attracts fines of up to 25 penalty units or imprisonment for six months or both. The trustee and the borrowing company enter into a deed, the terms of which set out the respective rights, powers and duties of the trustee, the borrowing company, any guarantor body and the debenture-holders. The aim of this procedure is to protect the interests of the debenture-holders. Section 283AB requires the trust deed to provide that: • the right to enforce the borrower’s duty to repay; • any charge or security for repayment; and • the right to enforce any other duties owed by the borrower or guarantor, are to be held on trust by the trustee for the benefit of the debenture-holders. The trustee has quite onerous obligations. The trustee must exercise reasonable diligence to ensure that the property of the borrower is and will continue to be sufficient to repay the debt when it becomes due: s 283DA(a). The trustee must also exercise reasonable diligence to ensure that the company and any guarantor comply with the trust deed: s 283DA(b). Section 283DA lists numerous other obligations placed on the trustee.

Duties of borrowers and guarantors [17.110] The obligations of borrowers and guarantors are set out in the covenants which form part of the trust deed. Sections 283BA – 283CE also impose direct statutory obligations on borrowers and guarantors. Among the most important of these are: • the duty of the borrower and/or guarantor to carry on and conduct its business in a proper and efficient manner (ss 283BB(a), 283CB(a)); and • the duty of the borrower and/or guarantor to make all its financial and other records available for inspection by the trustee and provide any information or assistance required: ss 283BB(c), 283CB(b). [17.110] 837

Business and Corporate Law

An intentional or reckless breach of any of these statutory duties by either a borrower or a guarantor is a criminal offence: ss 283BI and 283CE and see s 1311. A breach of these provisions attracts fines of up to 25 penalty units or imprisonment for six months or both.

Personal property securities [17.120] On January 2012, the Personal Property Securities (PPS) legislative regime came into effect. The PPS legislative framework comprised the following Acts: • Personal Property Securities Act 2009 (Cth) (PPS Act); • Personal Property Securities (Corporations and Other Amendments) Act 2010 (Cth); and • Personal Property Securities (Corporations and Other Amendments) Act 2011 (Cth). The PPS regime introduced a new functional approach to the regulation and registration of personal securities. It established a single harmonised national law designed to regulate the registration of security interests in personal property. The PPS regime aims to harmonise over 70 Commonwealth, State and Territory laws, common law and equity rules governing personal property securities. The PPS Act was modelled on personal property securities legislation in New Zealand, Canada and the United States and also incorporates work completed by the United Nations Commission on International Trade Law (UNCITRAL) and the International Institute for the Unification of Private Law (UNIDROIT).

Corporations Act amendments [17.130] The PPS reforms introduced a number of amendments to the Corporations Act that deal with the regulation and registration of security interests given by companies. Companies may give security for a loan in the form of a charge over the company’s land, its other assets or securities. A charge is the legal name given to any security for the repayment of a debt. It can take the form of a legal mortgage, but is more usually an equitable mortgage or charge. The definition section of the Corporations Act, s 9, defines a charge as “a charge created in any way and includes a mortgage and an agreement to give or execute a charge or mortgage, whether on demand or otherwise, under an agreement”. The PPS reforms implement a functional approach to security interests which applies to all security transactions where the effect is to secure a payment or performance of an obligation. This also includes fixed or floating charges which have been now redefined as reference to a security interest that is attached to either a circulating or non-circulating asset. 838 [17.120]

Loan Capital

| TOPIC 17

Circulating and non-circulating security interest [17.140] Under the previous law, charges were classified either as fixed or floating. With the introduction of the PPS reforms, a floating charge over property would now be referred to as a “security interest” that has attached to a circulating asset. For example: a floating charge that involves a “security interest” is one that is secured over a circulating asset such as stock, cash in bank and accounts receivable. Following the PPS reforms a fixed charge over property is now referred to as “security interest” over a non-circulating asset. Examples of a “security interest” over a non-circulating asset include loans or mortgages which are secured over a company’s land and buildings. There are two classes of circulating assets: 1.

Where the secured party has given the grantor (of the security) express or implied authority for any transfer of the personal property, in the ordinary course of the grantor’s business, free of the security interest; and

2.

Current assets including inventory, negotiable instruments, currency, at call deposits with a bank, building society or credit union (other than term deposits), accounts for turning over trading stock and accounts rendered for the provision of services that fall within the ordinary course of a business.

A security interest over a circulating asset would ordinarily allow the company to continue dealing with them in the ordinary course of its business – for example, by turning over trading stock. The lender has a valid security over this shifting fund of assets but has no right to interfere in the conduct of the business as long as the company does not breach any term of the security agreement and only deals with the charged assets in the ordinary course of its business: see Reynolds Bros (Motors) Pty Ltd v Esanda Ltd (1983) 1 ACLC 1333. Not all assets will fall within the two classes of a circulating asset and instead some personal property will be classified as non-circulating.

Security agreement [17.150] All of the rights and obligations attached to the security interest are now governed by the terms of the security agreement. The PPS reforms reaffirm that the definition of circulating assets conforms with the existing law on floating charges. This means that when determining whether or not a floating charge exists over personal property consideration will be given to the terms of the security agreement between the grantor and secured party. In addition, another important criterion is the level of control given to the secured party over the underlying asset. The greater the level of control the less likely the arrangement will be considered to meet the definition of a circulating asset. [17.150] 839

Business and Corporate Law

As with all agreements, the intention of both parties at the time the agreement is formed is also an important determining factor for appropriately classifying the arrangement.

Retention of title clauses under the PPS Act [17.160] Sometimes a seller will provide that transfer of title will not take place until the goods have been paid for. Such a provision is known as a retention of title clause or a “Romalpa clause”: see Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676. This is a common practice with sales of trading stock. The aim of a retention of title clause is to allow the seller to reclaim goods that would otherwise be included in the assets subject to a creditor’s claim under a crystallised floating security interest. A normal retention of title clause is useful only where the goods can be identified and where permission to enter premises has been given. If the goods have been transformed or mixed with other goods, the retention clause will fail and the seller will be in the same position as an unsecured creditor. Some retention of title clauses are now drafted in much broader terms so as to claim title to all goods supplied to the purchaser until the supplier is paid.

What is a “security interest”? [17.170] A “security interest” is defined under s 12 of the PPS Act to include an interest in personal property provided by any of the following transactions, if the transaction, in substance, secures payments or performance of an obligation: (a)

a fixed charge;

(b)

a floating charge;

(c)

a chattel mortgage;

(d)

a conditional sale agreement;

(e)

a hire purchase agreement;

(f)

a pledge;

(g)

a trust receipt;

(h)

a consignment;

(i)

a lease of goods;

(j)

an assignment;

(k)

a transfer of title;

(l)

a flawed asset arrangement

The PPS Act also makes clear what is not a security interest. Excluded from the definition are licences and an interest of a kind that is prescribed by the regulations: s 12(5). The security interest must arise because of a consensual transaction: Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd [2014] VSCA 326. 840 [17.160]

Loan Capital

| TOPIC 17

Registration of security interests [17.180] Previously, charges were registered under ss 262 and 263 (Ch 2K) of the Corporations Act. The PPS reforms repealed Ch 2K of the Corporations Act and replaced it with Ch 5 of the PPS Act. The charges that were previously registered under Ch 2K will now be migrated to the PPS Register which has been established by the PPS Act. The PPS Act amended the Corporations Act by creating a new s 588FL. Section 588FL replicates the previous ss 266 and 267 of the Corporations Act with a few modifications. For security interests that have been entered into after the commencement of the PPS reforms s 588FL will replace ss 266 and 267 of the Corporations Act. Section 588FL aims to prevent security interests being granted fraudulently over company assets where the company is at risk of imminent administration. Hence, s 588FL is a protective measure designed to protect trustees and unsecured creditors with claims over company assets that would otherwise become encumbered. SECTION 588FL Vesting of PPSA security interests if collateral not registered within time Scope (1)

This section applies if: (a)

(b)

any of the following events occurs: (i)

an order is made, or a resolution is passed, for the winding up of a company;

(ii)

an administrator of a company is appointed under section 436A, 436B or 436C;

(iii)

a company executes a deed of arrangement under Part 5.3A; and

company

a PPSA security interest granted by the company in collateral is covered by subsection (2). Note: A security interest granted by a company in relation to which paragraph (a) applies that is unperfected at the critical time may vest in the company under section 267 or 267A of the Personal Property Securities Act 2009.

(2)

This subsection covers a PPSA security interest if: (a)

(b)

at the critical time, or, if the security interest arises after the critical time, when the security interest arises: (i)

the security interest is enforceable against third parties under the law of Australia; and

(ii)

the security interest is perfected by registration, and by no other means; and

the registration time for the collateral is after the latest of the following times: [17.180] 841

Business and Corporate Law

(i)

6 months before the critical time;

(ii)

the time that is the end of 20 business days after the security agreement that gave rise to the security interest came into force, or the time that is the critical time, whichever time is earlier;

(iii)

if the security agreement giving rise to the security interest came into force under the law of a foreign jurisdiction, but the security interest first became enforceable against third parties under the law of Australia after the time that is 6 months before the critical time – the time that is the end of 56 days after the security interest became so enforceable, or the time that is the critical time, whichever time is earlier;

(iv)

a later time ordered by the Court under section 588FM.

Note 1: For the meaning of “critical time”, see subsection (7). Note 2: For when a security interest is enforceable against third parties under the law of Australia, see section 20 of the Personal Property Securities Act 2009. Note 3: A security interest may become perfected at a particular time by a registration that is made earlier than that time, if the security interest attaches to the collateral at the later time (after registration). See section 21 of the Personal Property Securities Act 2009. Note 4: The Personal Property Securities Act 2009 provides for perfection by registration, possession or control, or by force of that Act (see section 21 of that Act). (3)

[Repealed] Vesting of security interest in company

(4)

The PPSA security interest vests in the company at the following time, unless the security interest is unaffected by this section because of section 588FN: (a)

if the security interest first becomes enforceable against third parties at or before the critical time–immediately before the event mentioned in paragraph (1)(a);

(b)

if the security interest first becomes enforceable against third parties after the critical time–at the time it first becomes so enforceable.

Note: For the meaning of “critical time”, see subsection (7).

Property acquired for new value without knowledge (5)

842 [17.180]

Subsection (4) does not affect the title of a person to personal property if:

Loan Capital

(a)

(b)

| TOPIC 17

the person acquires the personal property for new value from a secured party, from a person on behalf of a secured party, or from a receiver in the exercise of powers: (i)

conferred by the security agreement providing for the security interest; or

(ii)

implied by the general law; and

at the time the person acquires the property, the person has no actual or constructive knowledge of the following (as the case requires): (i)

the filing of an application for an order to wind up the company;

(ii)

the passing of a resolution to wind up the company;

(iii)

the appointment of an administrator of the company under section 436A, 436B or 436C;

(iv)

the execution of a deed of company arrangement by the company under Part 5.3A.

Note: For what is actual or constructive knowledge, see sections 297 and 298 of the Personal Property Securities Act 2009. (6)

In a proceeding in Australia under this Act, the onus of proving the fact that a person acquires personal property without actual or constructive knowledge as mentioned in paragraph (5)(b) lies with the person asserting that fact.

(7)

In this section: critical time, in relation to a company, means: (a)

if the company is being wound up – when, on a day, the event occurs by virtue of which the winding up is taken to have begun or commenced on that day under section 513A or 513B; or

(b)

in any other case – when, on a day, the event occurs by virtue of which the day is the section 513C day for the company.

A key feature of s 588FL is that with a registered security interest protection is afforded by the very nature of the registration process. This effectively prevents or minimises the incidence of fraud from occurring especially with the granting of a security interest to a third party with knowledge of an imminent administration, liquidation or deed of company arrangement.

[17.180] 843

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Where there are unperfected security interests, on winding up or where a company is in Voluntary Liquidation, the security interests will vest in the grantor: see s 267, PPS Act. Section 588FL(2) applies where a security interest has been registered in Australia, the security interest will vest in the grantor where they have not been perfected by registration within six months of the company entering into external administration. In Pozzebon (Trustee) v Australian Gaming and entertainment Ltd [2014] FCA 1032, the secured parties lost their interest in the subject collateral. In this case, the secured parties did not register their interests until many months after the security agreement was entered into. This was despite the secured parties having registered their interest on the PPSR shortly prior to entering Voluntary Administration.

Effective and defective registration [17.190] The general rule is that registration is deemed to be effective from the time the description of the item is searchable on the PPS Register. It is the secured party’s responsibility to ensure that the information that is contained on the PPS Register is accurate and complete. Registration will be ineffective in circumstances where the details of the registration contain a seriously misleading defect in any of the data or information listed on the PPS Register. A defect would ordinarily include an irregularity, omission or error which is contained in the registration. Sections 164 – 166 of the PPS Act provide specific circumstances in which a registration would be deemed to be ineffective: • where an incorrect serial number has been entered into the PPS Register; • where the security interest has been mistakenly identified as a purchase money security interest; • where there is a defect in the data prescribed by the regulations.

Effect of defective registration [17.192] Similar to the previous s 262 of the Corporations Act, ineffective registration under the PPS Act does not affect the validity of the underlying security interest. However, if registration is defective it may affect the order or priority of payment of debt. The loss of priority which results from defective registration is a powerful motivation to ensure that the security interests are properly registered.

The Priority Rules [17.195] The priority rules under the PPS Act reflect those under the previous Ch 2K of the Corporations Act. Section 55 of the PPS Act covers the priority rules: • Perfected security interests vs unperfected security interests 844 [17.190]

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• Order of perfection (being by registration, possession or control) PERSONAL PROPERTY SECURITIES ACT 2009 (Cth) – SECTION 55 Default priority rules (1)

This section sets out the priority between security interests in the same collateral if this Act provides no other way of determining that priority. Note: For other rules about priorities, see the following: (a)

the remaining provisions of this Part;

(b)

Chapter 3 (agricultural commingling);

(c)

Part 9.4 (transitional application of this Act).

interests,

accessions

and

Priority between unperfected security interests (2)

Priority between unperfected security interests in the same collateral is to be determined by the order of attachment of the security interests.

Perfected security interest has priority over unperfected security interest (3)

A perfected security interest in collateral has priority over an unperfected security interest in the same collateral.

Priority for perfection in other ways (4)

Priority between 2 or more security interests in collateral that are currently perfected is to be determined by the order in which the priority time (see subsection (5)) for each security interest occurs.

(5)

For the purposes of subsection (4), the priority time for a security interest in collateral is, subject to subsection (6), the earliest of the following times to occur in relation to the security interest:

(6)

(a)

the registration time for the collateral;

(b)

the time the secured party, or another person on behalf of the secured party, first perfects the security interest by taking possession or control of the collateral;

(c)

the time the security interest is temporarily perfected, or otherwise perfected, by force of this Act.

A time is a priority time for a security interest only if, once the security interest is perfected at or after that time, the security interest remains continuously perfected.

[17.195] 845

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The priority rules under s 55 of the PPS Act are important because attachment and perfection can occur in any order. This could therefore allow a secured party to register a financing statement before the security agreement is actually finalized. In such circumstances, they will obtain priority to the collateral back to the actual registration date.

How to obtain Priority under the PPS Act [17.200] Under the PPS Act, a secured party must ensure that they perfect their security interest in order to obtain priority over that interest. Perfection refers to the process whereby a secured party obtains priority over the collateral which can be enforced against the grantor as well as a third party. Generally perfection occurs when a security interest is registered on the Personal Property Securities Register. Less commonly, perfection can also occur via possession or control. A number of steps are required for perfection to occur: • The security interest is to be attached to personal property as collateral. Once attached, a secured party can enforce the security against the debtor: see s 19, PPS Act. • The security interest must be enforceable against third parties. See s 20 of the PPS Act which requires written evidence of the agreement or possession or control over the collateral. • The secured party must have either possession or control over the collateral: see s 21, PPS Act. The most common form of perfection occurs by registration on the PPSR of a financing statement. See Re Maiden Civil (P&E) Pty Ltd v Queensland Excavation Services Pty Ltd [2013] NSWSC 852 which dealt with the PPS Act and priority vesting issues. Re Maiden Civil (P&E) Pty Ltd [17.205] Re Maiden Civil (P&E) Pty Ltd v Queensland Excavation Services Pty Ltd [2013] NSWSC 852 (Supreme Court of New South Wales) FACTS: In 2010, Queensland Excavation Services Pty Ltd & Ors (QES) purchased Caterpillar Equipment with third party finance. It then leased the same equipment to Maiden Civil (P&E) Pty Ltd (Maiden). The lease was not in writing. Maiden had possession of the equipment, making periodical lease payments to QES. QES did not register its interest in the equipment either on the Northern Territory Register) before 30 January 2012 or, after that date, on the PPS Register. Maiden borrowed money from Fast Financial Solutions Pty Ltd (Fast Financial) in March 2012, and at that time it granted Fast Financial a security interest over all of its assets, which also included the Caterpillar equipment. Fast Financial registered that interest on the PPS register.

846 [17.200]

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Fast Financial appointed receivers to Maiden in July 2012. On or at the same time QES terminated the QES Lease. Maiden’s receivers then claimed possession of the Caterpillar equipment. Maiden then went into voluntary administration and then into liquidation. HELD: The court found in favour of the receivers. Justice Brereton found that the QES Lease was a “PPS Lease” and was therefore a security interest in favour of QES. However, in question was whether s 20 of the PPS Act applied since it was not in writing. In addition, the lease was a transitional security interest because it was in force prior to 30 January 2012. The effect of this was that it could have had protection under the PPS Act for 2 years under the transitional provisions of the PPS Act. However, the court found that because it could have been registered on the relevant Northern Territory Register, and it was not, then the transitional protections did not apply and that the security interest was therefore not perfected. The court held that the receivers of Maiden were thus entitled to possession of the Caterpillar equipment, and could use it to satisfy the debt to Fast Financial. This was because Fast Financial’s security interest prevailed over that of QES. The basis for this outcome rested on the following points:

• Fast Financials interest was perfected. Under the PPS Act, perfected interests have priority over unperfected interests. It was not relevant that QES owned the Caterpillar equipment.

• In addition, the security interest of QES vested in Maiden upon Madien’s administration, and therefore QES has no further interest in such equipment.

Interestingly, the Corporations Act under s 588FM does allow corporate grantors of security interests to apply to the court for permission to allow for late registration. The court may exercise this discretion in circumstances where it can be shown that the failure to register was due to mere inadvertence. SECTION 588FM Extension of time for registration (1)

A company, or any person interested, may apply to the Court (within the meaning of section 58AA) for an order fixing a later time for the purposes of subparagraph 588FL(2)(b)(iv). Note: If an insolvency-related event occurs in relation to a company, paragraph 588FL(2)(b) fixes a time by which a PPSA security interest granted by the company must be registered under the Personal Property Securities Act 2009, failing which the security interest may vest in the company.

(2)

On an application under this section, the Court may make the order sought if it is satisfied that: [17.205] 847

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(a)

(b) (3)

the failure to register the collateral earlier: (i)

was accidental or due to inadvertence or some other sufficient cause; or

(ii)

is not of such a nature as to prejudice the position of creditors or shareholders; or

on other grounds, it is just and equitable to grant relief.

The Court may make the order sought on any terms and conditions that seem just and expedient to the Court.

Searching the PPS Register [17.210] The PPS Act provides that a person may search the Register by providing the following details in the search request: • grantor’s details; • serial number of any collateral described in the Register; • time of search; • earlier nominated time; • any other criteria prescribed by the regulations. One of the central rationales for the creation of the PPS Register was to provide a relatively cheap, efficient and accessible search facility of personal property securities within Australia. The additional benefit with the creation of a single uniform national register was that it achieved harmonisation of a number of State and Territory databases.

Transitional arrangements [17.220] The PPS Act came into effect on 30 January 2012 at the same time the PPS Register was created. The transitional provisions contained within the PPS Act apply to existing registrable charges. ASIC’s Register is now closed for any new registrations of personal property securities. The repeal of Ch 2K of the Corporations Act will not immediately apply to registrable charges under the Corporations Act. Instead, a number of provisions under Ch 2K will continue to apply to these registrable charges for seven years.

Subordinate debt [17.230] The parties to debenture trust deeds or loans secured by charges over company assets may make their own agreements about priority of payment in the event of liquidation. For example, debentures may be issued on terms that the debt owing is to be subordinated so that other debts will be repaid before it is repaid. Alternatively, the terms may rank the debt on the same repayment level as the share capital. Subordinated debt provides a means for a company 848 [17.210]

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to raise what is effectively quasi equity capital without diluting control of the company. The Federal Court looked at the issue of subordinate debt and legal characterisation in its decision in St George Ltd v Commissioner of Taxation [2008] FCA 453. In St George v FCT the Federal Court held that subordinate debentures used by St George Bank to finance a merger with Advance Bank Australia were properly characterised as equity capital and not debt. The Federal Court further held that since the debentures were not debt, any interest paid by St George was not an allowable deduction under Australian tax law. Influencing the Court’s decision in St George were factors unique to Authorised Deposit-taking Institutions (ADIs), such as banks. As part of its funding requirements for its proposed merger with Advance Bank Australia, St George was required to restore capital adequacy ratios and comply with the Reserve Bank of Australia’s prudential capital requirements. Since one of the main functions of the subordinate debentures issued by St George was to supplement St George’s Tier 1 and Tier 2 capital requirements, the Court was of the view that the debentures had the essential characteristics of capital rather than debt for tax purposes.

The Whittaker Report [17.240] The Whittaker Report, commissioned by the Australian Government and released in February 2015, undertook a review of the of the Personal Property Securities Act 2009 (Cth). It considered improvements to the PPS Act, with a focus on noncompliance with the PPS Act, opportunities for minimizing regulatory and administrative burdens, current inefficiencies, definition and scope of personal property covered by the PPS Act, and the integration of the PPS Act with other legislation. See Australian Government, Review of the Personal Property Securities Act 2009, Final Report, available from https://www.ag.gov.au/Consultations/ Documents/PPSReview/ ReviewofthePersonalPropertySecuritiesAct2009FinalReport.pdf.

Further Reading Austin RP and Ramsay I Ford’s Principles of Corporations Law, 16th ed, LexisNexis, 2014, Ch 19 Duggan A “Romalpa Agreements Post PPSA” (2011) 33 Sydney Law Review 645 Johnson R “Taking Security over Book Debts: The Position in Australia” (2006) 14 Insolv LJ 226 Lipton P, Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, Ch 11 McGrath T “The Floating Charge and Void and Voidable Transactions” (2002) 10 Insolv LJ 37 McWilliams D “The Floating Charge and its Place within Article 9, PPSA Security Regimes and Australian Law” (2004) 22 C&SLJ 481 [17.240] 849

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Turner PG “A Two-Stage Approach to Interpretation” (2004) 22 C&SLJ 427 Australian Government, B Whittaker, Review of the Personal Property Securities Act 2009, Final Report (2015) (The Whittaker Report) available from https://www.ag.gov.au/Consultations/Documents/PPSReview/ ReviewofthePersonalPropertySecuritiesAct2009FinalReport.pdf.

850 [17.240]

TOPIC 18 Fundraising Principles........................................................................................ Introduction.................................................................................... Different types of disclosure documents ................................................ When is a disclosure document required?.............................................. Form and content ............................................................................ Lodgment of disclosure documents ..................................................... Supplementary and replacement disclosure documents ........................... Advertisements ................................................................................ Securities hawking............................................................................ ASIC’s powers.................................................................................. Liability for disclosure documents ........................................................ Proposed disclosure regime for crowd-sourced funding offers....................

[18.10] [18.10] [18.40] [18.100] [18.120] [18.170] [18.180] [18.190] [18.200] [18.210] [18.220] [18.330]

Extract from J Yogaratnam and L Xynas, Corporations Law: In Principle (10th ed, Lawbook Co., 2017), Chapter 21.

Recent Developments Australian Securities and Investments Commission ASIC RG 228: Prospectuses: Effective Disclosure for Retail Investors (March 2016) ASIC RG 254: Offering Securities under a Disclosure Document (March 2016)

Corporations Act Amendments Corporations Amendment (Simple Corporate Bonds and Other Measures) Act 2014 (Cth)

Aim At the end of this Topic you should know: • the different types of disclosure documents and when each is required; • the general categories of exemption from providing a disclosure document; • the requirements for a complying disclosure document; and • the civil and criminal liabilities of the company, its directors, experts and others for false or misleading statements or non-disclosures in a disclosure document.

PRINCIPLES Introduction [18.10] This Topic deals with companies raising money from the public. Companies may raise capital through contributions by investors known to the [18.10] 851

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company or through loans from banks or other financial institutions. These “private” ways of raising funds are to be contrasted with offers or invitations to the public to invest in companies. Companies wishing to raise funds by offering their shares or other securities must prepare a disclosure document unless exempt. The provisions are set out in Ch 6D of the Corporations Act 2001 (Cth) (Corporations Act) (offers of other financial products are dealt with in Ch 7 as discussed in Chapter 22 (Yogaratnam)). Chapter 6D was introduced by the Corporate Law Economic Reform Program Act 1999 (Cth) (CLERP Act) on the basis that, as set out in the Commonwealth Treasury paper Fundraising – Capital Raising Initiatives to Build Enterprise and Employment Paper No 2 (CLERP Paper No 2, Canberra, 1997) p 9: disclosure of material information in an effective way places investors in a position to make more confident assessments about securities without undertaking their own costly inquiries. It is generally more practicable and cost-effective for the fundraiser, rather than numerous investors, to undertake inquiries and disclose details about its own business

Note: The law relating to disclosure documents is a technical, specialist area. The aim of this Topic is to provide an overview of this complex area. Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act) [18.12] The requirements in Chapter 6D do not apply to Aboriginal and Torres Strait Islander corporations as the members cannot own or trade shares or hold debentures: see Topic 15.

Application to public companies [18.20] It is important to note that the provisions relating to disclosure documents are not relevant for proprietary companies because they are prohibited from undertaking these types of fundraising activities. Section 113(3) provides that, “a proprietary company must not engage in any activity that would require disclosure to investors …” except for offers of shares to employees and existing shareholders. Furthermore, a proprietary company which breaches s 113 may be required to convert to a public company. Therefore, the disclosure document provisions apply only to public companies. Proprietary companies must merely beware of inadvertently contravening these provisions.

Legislative aims [18.30] The main aim of the provisions dealing with fundraising by public companies is to ensure that investors are in a position to make fully informed investment decisions. The provisions also aim to make it easier for smaller public companies to access capital. To achieve these aims, Ch 6D provides for different types of disclosure documents depending on the circumstances. For example, for certain types of offerings, such as offers where the amount to be raised is $10 million or less, a 852 [18.12]

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less complex offer document can be prepared. In order to facilitate offerings by small- and medium-sized enterprises (sometimes referred to as SMEs), the legislation provides for a type of offer document known as an offer information statement, which is less onerous to prepare. The Corporations Amendment (Crowd-sourced Funding) Bill 2015 (Cth) would introduce a regulatory framework to facilitate crowd-sourced equity funding by small, unlisted public companies. Note that the Bill lapsed on 9 May 2016 when Parliament was dissolved for the double dissolution. It may, however, be re-introduced at a later stage. The Bill would include a special disclosure regime to be used for certain offers of securities for issue by these companies, instead of complying with the general requirements under Ch 6D regarding disclosure to investors (and the related prohibitions, liabilities and remedies provisions). As a “CSF offer” under the proposed regime does not require the same level of disclosure as existing Ch 6D disclosure documents, there is to be a cap on the maximum amount of funds ($5 million) that an issuer company can raise under the crowd-sourced funding regime. These proposed amendments are discussed further below (see [18.330]).

Different types of disclosure documents [18.40] The types of disclosure documents in Ch 6D are: • a prospectus or a short form prospectus (or in some cases a special prospectus for quoted securities); • an offer information statement; • a profile statement; and • a two-part simple corporate bonds prospectus. The circumstances in which the different types of disclosure documents can be used are now considered.

Prospectus [18.50] The basic disclosure document for Ch 6D is a prospectus. Section 709 provides that if an offer of securities (other than an offer of simple corporate bonds) requires disclosure to investors, a prospectus must be prepared for the offer, unless an offer information statement can be used instead. The form and content requirements for a prospectus are considered at [18.120]. Where a prospectus is required, s 712 provides that it may simply refer to material lodged with ASIC rather than setting it out in full. This is referred to as a short form prospectus and may be used for any offer of securities. The use of a short form prospectus is designed to reduce disclosure obligations requirements compared to a full prospectus. In certain circumstances an entity that is listed on a financial market (such as the ASX) and has been subject to the continuous disclosure regime (see Chapter 22 (Yogaratnam)) can make an offer of securities using a prospectus for quoted securities. This type of prospectus is less onerous to prepare than a [18.50] 853

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full disclosure prospectus: s 713. The circumstances in which such a prospectus can be used and what is required are discussed at [18.130]. An alternative for a listed entity undertaking a rights issue is to rely on the exemption in s 708AA (see [18.110]).

Offer information statement [18.60] If the amount to be raised by the offer (including amounts raised by previous offers) is $10 million or less, an issuer may prepare an offer information statement instead of a prospectus. The threshold amount was increased from $5 million in 2007 to encourage the wider use of the offer information statement. However, because an offer information statement contains reduced disclosure, ASX has stated that the statement cannot be used if the company wishes to have its securities quoted on the ASX: see [18.140]. The disclosure requirements for an offer information statement are less onerous than for a prospectus (see [18.140]). There are also some differences relating to defences to liability for the content of an offer information statement. These matters are considered at [18.140] and [18.250].

Profile statement [18.70] A profile statement can be used for an offer of securities if approved by ASIC. However, according to s 709 it is still necessary to prepare a prospectus and lodge it with ASIC and to provide a free copy to investors if they ask for it. The aim of the profile statement provisions was to provide investors with a more concise, and therefore more useful, document and to promote comparability between similar investment products. ASIC decided that initially the only case in which it would allow use of a profile statement was for the offer of interests in unlisted registered managed investment schemes formed to invest in cash, equities, property securities, fixed interest securities or related assets. As a result of amendments made by the Financial Services Reform Act 2001 (Cth), offers of such financial products are now regulated under Ch 7: see Chapter 22 (Yogaratnam) at [22.40]. However, it is possible that ASIC may permit the use of profile statements in other circumstances in the future. The information requirements for a profile statement are considered at [18.150].

Two-part simple corporate bonds prospectus [18.80] Offers of “simple corporate bonds” must use a two-part disclosure document, which is referred to as a two-part simple corporate bonds prospectus. A full prospectus is generally required for offers of corporate bonds to retail investors. However, following amendments introduced by the Corporate Amendment (Simple Corporate Bonds and Other Measures) Act 2014 (Cth), a specific disclosure regime applies to offers of simple corporate bonds. A simple corporate bond is a debenture that satisfies particular criteria set out in s 713A. The conditions that must be satisfied include that the securities 854 [18.60]

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are or will be quoted on a prescribed financial market, and that the issuer is a body that has continuously quoted securities or is a wholly owned subsidiary of such a body that has or agrees to guarantee repayment of principal and interest. The two-part simple corporate bonds prospectus is composed of a base prospectus and an offer-specific prospectus: s 713B. There are also special rules for the lodgement of disclosure documents (see [18.150]) and supplementary and replacement documents (see [18.160]): ss 713B(5), 719A.

Section 705 [18.90] Section 705 provides a table showing the types of disclosure documents and the relevant sections. SECTION 705 Types of disclosure document The following table shows what disclosure documents to use if an offer of securities needs disclosure to investors under this Part. Disclosure document Type 1 prospectus The standard full-disclosure document.

Sections content [710, 711, 713] procedure [717] liability [728 and 729] defences [731, 733]

2 short form prospectus May be used for any offer. content [712] Section 712 allows a prospectus to refer to material lodged with ASIC instead of setting it out. Investors are entitled to a copy of this material if they ask for it. 2A 2-part simple corporate bonds prospectus

Must be used for any offer of simple corporate bonds.

content [713C, 713D, 713E] procedure [717] liability [728 and 729] defences [731 and 733]

3 profile statement

[18.90] 855

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Disclosure document Type Section 721 allows a brief profile statement (rather than the prospectus) to be sent out with offers with ASIC approval. The prospectus must still be prepared and lodged with ASIC. Investors are entitled to a copy of the prospectus if they ask for it. 4 offer information statement Section 709 allows an offer information statement to be used instead of a prospectus for an offer to issue securities if the amount raised from issues of securities is $10 million or less.

Sections content [714] procedure [717] liability [728 and 729] defences [732, 733]

content [715] procedure [717] liability [728 and 729] defences [732, 733]

When is a disclosure document required? Offers requiring disclosure [18.100] Section 706 provides that an offer of securities for issue requires disclosure unless the offer is exempt under ss 708 or 708AA. It is therefore necessary to consider the terms “offer”, “securities” and “issue” and then to consider the exemptions. For the purposes of the fundraising provisions, the term offer is defined to include “inviting applications for the issue of the securities”: s 700(2). The term is not, therefore, limited to its technical or contractual meaning and could include distributing material that would encourage a person to enter into a course of negotiations calculated to result in the issue of securities: AttorneyGeneral (NSW) v Australian Fixed Trusts Ltd [1974] 1 NSWLR 110. The securities covered by the fundraising rules are shares of a body, debentures of a body (or legal or equitable interests in them) and options to acquire (by way of issue) any such securities: s 700. This definition means that the disclosure provisions apply to securities of a body (not just a corporation). A “body” is defined as any body (whether corporate or unincorporated) and includes societies and associations: s 9. It is important to note that the fundraising provisions are primarily concerned with initial or primary offers of securities (that is, the issue of securities), not with secondary trading of securities (that is, the sale of existing securities). 856 [18.100]

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An offer of securities for sale (rather than issue) only requires a disclosure document in limited circumstances. A disclosure document will be required in three cases: 1.

a person making the offer controls the body and the securities are either not quoted on the ASX, or if quoted, not offered for sale in the ordinary course of trading (s 707(2)) – for example, a sale by way of a “crossing” (see Glossary) negotiated “well away from any stock market” would not be in the ordinary course of trading (Aberfoyle Ltd v Western Metals Ltd (1998) 84 FCR 113); or

2.

there is an indirect issue, that is, an offer of the securities for sale within 12–months after their issue and the body issued the securities without preparing a disclosure document (presumably because an exemption applied) and: • the body issued the securities with the purpose of the investor selling or transferring them, or • the person acquired the securities with the purpose of selling or transferring them: s 707(3).

3.

there is an indirect issue, that is, an offer of the securities for sale within 12 months after their issue by a person who controls the body and the securities are not quoted on the ASX, the body issued the securities without preparing a disclosure document (presumably because an exemption applied) and: • the body issued the securities with the purpose of the investor selling or transferring them, or • the person acquired the securities with the purpose of selling or transferring them: s 707(5).

Unless the contrary is proved, the body or person is taken to have the relevant purpose in s 707(3) or (5) if any of the securities are subsequently sold, or offered for sale, within 12 months of their issue: s 707(4), (5). In both cases, however, no disclosure document is required if the offer for sale is exempt under s 708, for example, if the on-sale is to a professional investor (see [18.110]). The purpose of s 707(3) and (5) is to prevent the disclosure requirements being circumvented by the issue of securities to a party to whom disclosure is not required (for example, because of s 708) and that party then offers the securities for sale to investors without disclosure (see Re Golden Gate Petroleum Ltd (2010) 77 ACSR 17). The provisions will apply even if the sale is by a subsequent purchaser: Australian Securities and Investments Commission v Axis International Management Pty Ltd (2011) 81 ACSR 631. The court does have power under s 1322 to validate offers and sales that do not comply with s 707(3) or (5) if it is satisfied that no injustice has occurred: Re Silver Lake Resources Ltd [2012] FCA 32. [18.100] 857

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Section 708A exempts the issuer from compliance with s 707(3) or (5) if investors already have access to prospectus-type information – for example, because a prospectus relating to an offer to the public has been issued at about the same time as the private placement. ASIC has issued RG 173 Disclosure for on-sale of securities and other financial products (updated March 2016) which indicates when relief from the operation of s 707(3) and (5) might be available.

Excluded offers [18.110] There are a number of offers of securities that do not require a disclosure document: s 708. The exemptions generally apply to both issues and sales that might otherwise require a disclosure document. In some cases the exemption arises because it is likely that the potential investor will already have access to information. In other cases the exemption arises because of the prohibitive cost of requiring disclosure for small-scale fundraising. Some of the exemptions are very technical and require an understanding of other definitions, but briefly the exemptions are: • the small scale exemption – where personal offers are made that result in issues to no more than 20 people in any 12-month period and with no more than $2 million being raised in total. A personal offer is one that may only be accepted by the person to whom it is made and the person is likely to be interested in the offer because of some previous contact with the offeror, some professional or other connection to the offeror, or where the person has expressed an interest in the offer (s 708(1) – (7)); • the sophisticated investor exemption – where offers are made to investors who are considered to be sophisticated by virtue of the size of their investment ($500,000 plus) or their wealth (net assets of at least $2.5 million or gross income for each of last two financial years of at least $250,000) as certified by a qualified accountant. Alternatively, offers made through a licensed securities dealer (see Chapter 22 (Yogaratnam)) who certifies that the investor has sufficient investment experience and the investor signs a written acknowledgement that they have not received a disclosure document (s 708(8) – (10)); • the professional investor exemption – where the offer is made to a licensed securities dealer or investment adviser (see Chapter 22 (Yogaratnam)) who is acting as principal in the transaction or to certain specified bodies such as banks, insurance companies or regulated superannuation funds or to people who control at least $10 million for the purpose of investment in securities (s 708(11)); • the associated party exemption – where the offer is made to a “senior manager” of the body or of a related body. The exemption also applies to a spouse, parent, child, brother or sister of a senior manager, or to a company controlled by any of those people. The term senior manager is defined in s 9 but appears to exclude a director. ASIC issued a Class Order in 2004 to clarify that directors are included: CO 04/899 (s 708(12)); 858 [18.110]

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• the existing holder exemption – where offers are made to existing holders of securities, but only if the offer is for fully paid shares under a dividend reinvestment plan or bonus share plan; or if the offer is to issue debentures to one or more existing debenture holders (s 708(13), (14)); • the no consideration exemption – where no consideration is to be provided for the issue or transfer of the securities. ASIC has taken the view that offers under an Employee Share Scheme do not fall within this exemption, even where the scheme does not require any payment, because the employment relationship is a form of consideration: RG 49: Employee Incentive Schemes, RG 49.10 (s 708(15), (16)); • the takeovers and schemes of arrangement exemption – where the securities are offered as consideration under a takeover bid made under Ch 6 (see Chapter 23 (Yogaratnam)) and must, therefore, be accompanied by a bidder’s statement. In relation to schemes of arrangement (sometimes used as an alternative to a takeover), the exemption is available if the securities are issued under a compromise or arrangement under Pt 5.1 that has been approved at a meeting held as a result of a court order under s 411 (s 708(17), (18)); • the deed of company arrangement exemption – where the securities are offered to a company’s creditors under a deed of company arrangement, and the sole consideration is the release of the company from a debt (s 708(17A)); • the debentures exemption – where the offer of debentures is made by an Australian ADI (authorised deposit-taking institution) as defined in s 9, or a body registered under the Life Insurance Act 1995 (Cth) (s 708(19)); • the exempt bodies and public authorities exemption – where the offer is made by an “exempt body”, defined in s 66A as a body incorporated under the law of a State or Territory rather than registered under Corporations Act, or where the offer is made by an “exempt public authority”, defined in s 9 as a body corporate that is a public authority, or instrumentality or agency of the Crown (although the exemption does not apply to the sale of existing securities by a government body) (s 708(20), (21)). There are three other exemptions that should be noted: • the rights issue exemption – under s 708AA for rights issues involving offers of quoted securities. This exemption is subject to a number of requirements including that the securities have not been suspended from trading on a financial market for more than five days in the past 12 months. However, the most important requirement is that the offeror gives a notice to the market operator (the ASX) that states that the company has complied with its continuous disclosure obligations (see Chapter 22 (Yogaratnam)) or sets out any information that has been excluded in accordance with the Listing Rules. This is commonly referred to as a “cleansing notice”. The term “rights issue” is defined as an offer made to all shareholders in a class on the same terms: s 9A. This appears to provide an easier alternative to the special prospectus for quoted securities (see [18.130]) but it is not a “disclosure document” and so the defences to liability, eg for misleading statements [18.110] 859

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discussed at [21.250] to [21.280] are not available. ASIC has published a Regulatory Guide that covers this exemption: RG 189: Disclosure Relief for Rights Issues; • the secondary sales exemption – under s 708A an offer involving secondary sales of existing securities is exempt from the disclosure requirements in Ch 6D, as well as the disclosure requirements under Pt 7.9 provided the securities have been listed and quoted on a prescribed financial market for a period of three months: s 708A(5)(a). Circumstances in which the exemption applies have been noted in [18.110]. The offeror must provide a notice to the market operator stating that all relevant information has been disclosed or that a current prospectus is available. ASIC has released a Regulatory Guide that, inter alia, deals with this exemption from the requirements for offers of securities for sale: see “RG 173: Disclosure for On-Sale of Securities and Other Financial Products”; and • the employee share schemes exemption – offers of securities to employees under an employee share scheme will be within s 706 and are not covered by any exemptions. ASIC has provided some relief from the requirement to produce a prospectus or other disclosure document in RG 49: Employee Incentive Schemes, CO 14/1000 (listed entities) and CO 14/1001 (unlisted entities). In order to be eligible for the relief there must be an employer/ employee relationship or a relationship of sufficient interdependence (that is, being contracted to work the pro-rata equivalent of 40% or more of a comparable full-time position). For listed entities, there is a limit of 5% of the shares in the entity being offered under the scheme (this is to ensure that the purpose of the offer is not fundraising). The relief available for offers by unlisted entities is much more limited than the relief for listed entities, and has meant that it is difficult for unlisted entities to offer employees the opportunity to acquire shares under an employee share scheme. One possibility is that the employer could prepare an Offer Information Statement (see [18.140]) but the requirement to include an audited financial statement prepared within the last six months is considered onerous for many unlisted entities.

Form and content What must a disclosure document contain? [18.120] The form and content requirements for disclosure documents are contained in ss 710 – 716. The content requirements differ depending on the type of disclosure document being used – prospectus, offer information statement, profile statement or two-part simple corporate bonds prospectus. A prospectus must contain all information that investors and their professional advisers would reasonably require to make an informed assessment of certain matters set out in the legislation: s 710. This is described as the “general disclosure obligation”.

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SECTION 710 (ABRIDGED) Prospectus content – general disclosure test (1)

A prospectus for a body’s securities must contain all the information that investors and their professional advisers would reasonably require to make an informed assessment of the matters [set out below]. The prospectus must contain this information: (a)

only to the extent to which it is reasonable for investors and their professional advisers to expect to find the information in the prospectus; and

(b)

only if the person [who participates in the preparation of the prospectus]: (i)

actually knows the information; or

(ii)

in the circumstances ought reasonably to have obtained the information by making enquiries.

Offer Matters 1 offer to issue (or • the rights and liabilities attaching to the transfer) shares securities offered [or] debentures…

• the assets and liabilities, financial position and performance, profits and losses and prospects of the body that is to issue the shares [or] debentures or interests

From this section it is clear that the general disclosure obligation attempts to place the onus for full and accurate disclosure on those preparing the prospectus, rather than just requiring them to comply with a checklist of information. This general disclosure obligation only requires information to be disclosed if certain people actually know, or ought reasonably to have obtained, the information by making enquiries. A person’s knowledge is relevant only if they are: • the person offering the securities or one of its directors; or • an underwriter, a financial services licensee, an expert or adviser named in the prospectus: s 710(3). In deciding what information should be included under the general disclosure obligation, the offeror must have regard to: • the nature of the securities and of the body; • the matters that likely investors may reasonably be expected to know; and [18.120] 861

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• the fact that certain matters may reasonably be expected to be known to their professional advisers: s 710(2). There has been debate about whether the requirement to include information about “prospects” of the issuer equates to a requirement to include a financial forecast in the prospectus. There is no authority to say that a forecast is required in all circumstances. Market expectations mean that most disclosure documents do contain forecasts. It has been stated, however, that if a forecast is included, special care must be taken to ensure that the statement is not misleading or deceptive: Pancontinental Mining Ltd v Goldfields Ltd (1995) 13 ACLC 577; Solomon Pacific Resources NL v Acacia Resources Ltd (1996) 19 ACSR 238. ASIC has issued a Regulatory Guide dealing with RG 170: Prospective Financial Information. ASIC agrees that if a forecast is included there must be reasonable grounds for making the forecast. In addition to the information that must be disclosed under the general disclosure obligation, there are a number of specific matters that must be disclosed under s 711. They include: • the terms and conditions of the offer; • interests and fees of people involved in the preparation of the prospectus; • details of any application to be quoted on a securities exchange (if applicable); • the expiry date of the prospectus (not later than 13 months from the date of the prospectus); and • any additional information required by the Regulations. The prospectus must also be dated (that is, the date of lodgment with ASIC) and contain the consent of any experts: s 716. A prospectus may be in paper or an electronic format. However, there is a requirement that an application form is “included in, or accompanied by” the disclosure document: ss 723(1), 727(2). For examples of prospectuses, as well as other disclosure documents, see the OFFERlist page at the ASIC website: http://www.asic.gov.au/online-services/register-for-online-access/offerlist. As already noted, in any case in which a prospectus is required it is possible to use a short form prospectus – that is, the prospectus may simply refer to a document (or part of a document) that has been lodged with ASIC: s 712. If the information referred to is primarily of interest to professional advisers or professional investors, the prospectus must include a description of the contents of the document and a statement that it is of interest to those people. In all other cases, the prospectus must include sufficient information about the contents of the document to allow investors to decide whether to obtain a copy of the document. If a prospectus indicates that application will be made for listing on a financial market (whether in Australia or not) and no application is made within the specified time, or permission for listing is not obtained, any allotment or issue which has been made is void: s 723(3). 862 [18.120]

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ASIC has issued a Regulatory Guide “RG 228: Prospectuses: Effective Disclosure for Retail Investors” which notes at [RG 228.2] that information in disclosure documents must be worded and presented in a “clear, concise and effective manner” (see s 715A which applies to all disclosure documents) and provides guidance for complying with the general disclosure obligation in s 710. This Regulatory Guide was produced after criticism that many prospectuses contained too much marketing material and did not present key information to retail investors in an appropriate way.

Offers of listed securities [18.130] A prospectus for an offer of listed securities is only required to contain information about the transaction and other material information not previously disclosed to the market: s 713. The reason for this less onerous disclosure obligation for a prospectus for quoted securities is that an entity whose securities are listed will be subject to the continuous disclosure regime: see Chapter 22 (Yogaratnam). The aim of this provision is to simplify prospectuses that will, in most cases, be sent to existing shareholders (as in a rights issue). Most of the information normally required in a prospectus will already have been provided to the market. However, information that does not have to be disclosed under the continuous disclosure rules (for example, under the ASX Listing Rule 3.1A.2 exemption for certain confidential information: see Chapter 22 (Yogaratnam)) will have to be disclosed in the prospectus if investors and their advisers would reasonably require that information to make an informed investment decision: s 713(5). ASIC may preclude an entity from using this type of prospectus if it believes that the shortened form of disclosure is inappropriate: see Section C of Regulatory Guide RG 254: Offering Securities under Disclosure Documents. As already noted at [18.110] an alternative for a listed entity is to comply with the exemption in s 708AA and produce a cleansing statement that complies with that section.

Offer information statements [18.140] As already noted, an offer information statement may only be used where the amount of money to be raised by the offer of securities (including amounts raised by previous offers) is $10 million or less. The disclosure obligation for an offer information statement is limited to the specific information required by s 715(1). The general disclosure obligation does not apply. An offer information statement must: • identify the body and the nature of the securities; • describe the body’s business; • describe what the funds raised by the offer are to be used for; • state the nature of risks involved in investing in the securities; • give details of amounts payable such as fees, commissions and charges; [18.140] 863

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• state that a copy has been lodged with ASIC but that ASIC takes no responsibility for the content; • state that the document is not a prospectus and contains a lower level of disclosure; • state that investors should obtain professional investment advice; • include an audited financial report prepared within the last 6 months; and • include any other information required by the regulations. Regulatory Guide “RG 157: Financial Reports for Offer Information Statements” discusses the form and content of financial reports required to be included in an offer information statement. The ASX has indicated that it will not accept an offer information statement for a company wishing to have its securities quoted on the ASX: see ASX Listing Rule 1.1, Condition 3. If a company wishes to apply for listing following the offer of securities, it will need to issue a prospectus.

Profile statements [18.150] A profile statement can only be used if ASIC has given its approval. As already noted, there are no existing approved situations for the use of a profile statement. However, even if the use of a profile statement is approved, it is still necessary to prepare and lodge a prospectus that complies with the content requirements for a prospectus and to provide a free copy of the prospectus to investors if they request it. Section 714 provides that a profile statement must contain: • information about the body; • the nature of the securities; • the nature of the risks involved in investing in the securities; • give details of amounts payable such as fees, commissions and charges; and • any other information required by ASIC.

Two-part simple corporate bonds prospectus [18.160] Offers for issue or sale of simple corporate bonds must be offered under a two-part simple corporate bonds prospectus (unless the offer period commences before 19 December 2016, whereby s 709(1A) allows a full prospectus to be used). A two-part simple corporate bonds prospectus contains both a base prospectus and an offer-specific prospectus. The base prospectus has a life of three years and there will be a separate offer-specific prospectus for each offer of bonds during the life of the base prospectus. The base prospectus must provide general information about the issuer and the bond issue that is unlikely to change over those three years. The content that must be included in the base prospectus is set out in s 713C and reg 6D.2.04. It includes the following: 864 [18.150]

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• information on the program of the bonds (if applicable) and details of key aspects of the bonds, including the interest rate, term, maturity and redemption of the bonds; • information about the issuing body’s business, management personnel, business strategy and governance arrangements, and other information that relates to the investment decision; • key financial ratios, calculated in accordance with reg 6D.2.06, that are relevant to the issuing body; and • the main risks associated with the bonds, the issuing body’s main business risks, and other risks relevant to a consumer’s investment decision: reg 6D.2.04. The offer-specific prospectus must provide offer details, key dates and other relevant information for the offer and may update information contained in the base prospectus: see s 713D and reg 6D.2.05. Certain material can be incorporated by reference in both the base prospectus and the offer-specific prospectus: s 713E.

Lodgment of disclosure documents [18.170] A disclosure document (with the exception of a two-part simple corporate bonds prospectus) must be lodged with ASIC prior to distribution: s 718. This means that a person offering securities will generally be permitted to distribute a disclosure document immediately after it has been lodged with ASIC. However, in the case of unlisted securities, there is a seven-day waiting period after lodgment, which may be extended to 14 days by ASIC, before applications can be processed: s 727(3). The waiting period is to give ASIC an opportunity to review the disclosure document for defects. ASIC’s policy with respect to reviewing disclosure documents is set out in ASIC Regulatory Guide RG 254: Offering Securities under a Disclosure Document. In that Regulatory Guide (Section F), ASIC states that it will: • refuse to accept or comment on draft disclosure documents prior to lodgment (other than in exceptional circumstances); • review selected disclosure documents during the waiting period (documents will be selected for review if there is reason to suspect a compliance risk or on a random basis); and • review disclosure documents after lodgment on the same basis as above. However, even if ASIC reviews the disclosure document, it takes no responsibility for the content of the disclosure document and the disclosure document must contain a statement to that effect: s 711(7)(b); s 714(1)(e)(ii); s 715(1)(f)(ii). Two-part simple corporate bonds prospectuses are not subject to the same lodgment requirements as other disclosure documents. A two-part simple [18.170] 865

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corporate bonds prospectus for an offer of simple corporate bonds is taken to have been lodged with ASIC on the day the offer-specific prospectus for the offer is lodged with ASIC: s 713B(5).

Supplementary and replacement disclosure documents [18.180] Where the person making an offer of securities becomes aware of a deficiency in the disclosure document or a new circumstance has arisen that would have been required to be included in the disclosure document, the person may lodge either a supplementary or replacement prospectus: s 719(1). A supplementary prospectus merely cures a deficiency or updates information. It must accompany any subsequent issue of the prospectus. The issuer of the securities may lodge with ASIC a supplementary prospectus if: • the issuer becomes aware of a misleading or deceptive statement in the disclosure document; or • there is an omission of information required under ss 710 – 715; or • a new circumstance has arisen since the disclosure document was lodged: s 719. A replacement prospectus is necessary where changes are more significant. The replacement prospectus supplants the original, which must not be issued after lodgment of the replacement prospectus. There are similar rules regarding lodging supplementary and replacement documents that apply specifically to a two-part simple corporate bonds prospectus, which are set out in s 719A. It is an offence to continue making offers of securities (including offers of simple corporate bonds) where there is a deficiency in the disclosure document, or a new circumstance, that is materially adverse from the point of view of the investor: s 728(3). Liability under Ch 6D is considered at [18.220] to [18.320].

Advertisements [18.190] There are some restrictions on advertising both before a disclosure document has been lodged with ASIC (“pre-disclosure document period”) and after it has been lodged (“post-disclosure document period”). The restriction on advertising and publicity surrounding an offer of securities is based on the view that an investment decision should be made primarily on the information contained in the disclosure document. The basic prohibition is that if an offer of securities needs a disclosure document, a person must not advertise it, or publish a statement that directly or indirectly refers to the offer, or is reasonably likely to induce people to apply for the securities, unless one of the exceptions applies: s 734(2), (2A). In deciding whether a statement directly or indirectly refers to the offer or is reasonably likely to induce a person to apply for securities, regard is had to such matters as whether the statement forms part of the normal advertising of 866 [18.180]

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the body’s products: s 734(3). The exceptions then permit certain advertising in the pre- and post-disclosure document periods and, in the former case, differ depending on whether or not the securities are quoted on a financial market. The position is as follows: • for (pre-disclosure document period) offers of securities quoted on a financial market – in the advertising is permitted provided a statement is included that a disclosure document will be available and that anyone wishing to acquire securities will need to complete an application form in or with that document (s 734(5)(a)). Under s 734(5)(a) the advertisement must include a statement regarding the following: – – – –

the identity of the issuer or vendor of the securities; that a disclosure document will be made available; where and when the disclosure document will be available; that an investor who intends to purchase the securities should consider the disclosure document; and – that an investor who intends to acquire the securities must do so using the application form in the disclosure document. • for offers of securities not quoted on a financial market in the pre-disclosure document period all that is permitted is a “tombstone” advertisement that states that a disclosure document will be available and that anyone wishing to acquire securities will need to complete an application form (s 734(5)(b)); and • for offers in the post-disclosure document period, whether or not the securities are quoted on a financial market – advertising is permitted provided it refers to the disclosure document and states that anyone wishing to acquire securities will need to complete an application form: s 734(6). There are also a number of exceptions designed to permit companies to carry on their normal advertising and other business: s 734(7)(a) – (e). See also “RG 158: Advertising and Publicity for Offers of Securities”.

Securities hawking [18.200] A person must not offer securities for issue or sale in an unsolicited meeting with, or telephone call to, another person: s 736. This is generally referred to as “securities hawking”. The rationale for this prohibition is to prevent unsolicited offers of securities through pressure-selling techniques. What is prohibited is an unsolicited meeting or telephone call; the prohibition does not apply to communications by email, facsimile or post (presumably because these communication methods are less direct). Under s 736(2), the prohibition does not apply to an offer of securities if: • the offer does not need a disclosure document because of s 708(8) or (10) (the sophisticated investor exemption) or s 708(11) (the professional investor exemption) (see [18.110]); [18.200] 867

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• the offer is an offer of quoted securities made by telephone by a licensed securities dealer; • the offer is made to a client by a licensed securities dealer through whom the client has bought or sold securities in the last 12 months; or • the offer is made under an eligible employee share scheme as defined in s 9 (see [18.110]). If securities are issued or transferred in breach of the securities hawking prohibition, investors may return securities within one month after issue or transfer. If investors do so they are entitled to be repaid the amount they paid for the securities: s 738. ASIC has released a Regulatory Guide on this matter, “RG 38: The Hawking Provisions”.

ASIC's powers [18.210] An important feature of Ch 6D is that it gives ASIC a number of powers. One power allows ASIC to exempt a person from a particular provision or to modify or vary any of the provisions in Ch 6D where strict compliance with the letter of the law appears to ASIC to be inappropriate: s 741(1). This allows issuers a level of flexibility in the operation of the fundraising provisions in circumstances where application of the law may be too onerous. ASIC also has power to act quickly where it believes that a lodged disclosure document may contain misstatements or omissions: see discussion of s 728 that deals with misstatements or omission in [18.220]. Section 739 allows ASIC to issue a stop order that prevents any further offers, issues, sales or transfers of the securities being made. ASIC can also issue a stop order where it is satisfied that the information in a disclosure document is not worded and presented in a clear, concise and effective manner as required by s 715A. ASIC regularly issues reports dealing with regulation and oversight of corporate fundraising. These reports set out the concerns ASIC has had with fundraising documents over the previous six months and the action that ASIC has taken. The following report (released February 2016) covers the period July to December 2015. REPORT 469: ASIC regulation of corporate finance: July to December 2015 Disclosure concerns

[18.212] 22 In our review of prospectuses lodged with ASIC during this period, we noted concerns, requested amended disclosure or intervened in offers of securities where there was:

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(a)

inappropriate disclosure of financial information and company solvency (over 10% of all prospectuses lodged, which is down from the previous period); and

(b)

improper disclosure of forecast financial information (in 4% of prospectuses lodged, slightly down from 4.8% in the previous period).

... 24 We noted concerns, requested amended disclosure or intervened in a number of offers due to insufficient disclosure about the structure of the offer. For example, in all prospectuses lodged during this period: (a)

control issues were identified in over 6% of prospectuses (down from 10% in the previous period). These concerns are primarily identified in prospectuses for rights offers; and

(b)

related party issues were evident in over 3% of prospectuses (up from 2% in the previous period).

25 We also raised a number of disclosure concerns in this period regarding: (a)

funding or financing (in almost 7% of prospectuses lodged, down from 8% in the previous period);

(b)

compliance with industry reporting codes, such as the Australasian Code for Reporting of Explorations Results, Minerals Resources and Ore Reserves (JORC Code) in mining prospectuses (2% of prospectuses lodged).

26 We identified a number of other common disclosure concerns, such as companies failing to: (a)

adequately disclose their business model;

(b)

provide “clear, concise and effective” disclosure;

(c)

disclose material contracts;

(d)

provide adequate risk disclosure – the disclosure is either insufficiently prominent in the prospectus or is not tailored to the company’s circumstances; and

(e)

obtain consent from an entity or individual to whom they have expressly or impliedly attributed consent.

© Australian Securities & Investments Commission. Reproduced with permission.

The following media release highlights the action that could be taken by ASIC where it regards a prospectus as deficient. ASIC acts against Pluton Resources for disclosure and reporting failures [18.214] Media Release 15-007 21 January 2015 ASIC has acted to restrict Perth-based Pluton Resources Limited (Receivers and managers appointed) (Pluton) from issuing a reduced content prospectus until 15 January 2016. [18.214] 869

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ASIC’s decision means Pluton will not be able to rely on reduced disclosure rules if they want to raise funds from investors using a prospectus. The decision follows concerns that Pluton failed to comply with its continuous disclosure obligations and various reporting requirements. In particular, ASIC found that Pluton failed to lodge its Annual Financial Report for 2014 with ASIC by 30 September 2014 and failed to report to its members (via an Annual General Meeting) by 31 October 2014. ASIC also found that between 28 January 2014 and 22 April 2014, Pluton failed to disclose the terms of a Convertible Securities Agreement with YA Global Masters SPV Ltd, entered into on or by 28 January 2014, until the release of an announcement to the market entitled “Prospectus for Entitlements Issue” on 22 April 2014. This information was information that was required to be disclosed under ASX Listing Rule 3.1. ASIC Commissioner John Price said, “Current and potential future shareholders in a company need to be in an informed position to assess a company’s prospects and its financial position”. “In appropriate cases, ASIC will act against companies that fail to meet their reporting and disclosure obligations to ensure all material information is made available in future fundraisings.” © Australian Securities & Investments Commission. Reproduced with permission.

Liability for disclosure documents Liability under the Corporations Act [18.220] Chapter 6D contains a number of prohibitions. Breach of these prohibitions can give rise to criminal liability and in some cases, civil liability. The most significant prohibition is to be found in s 728 which deals with defective disclosure documents. Chapter 6D also prohibits a range of other conduct such as: • making offers that require disclosure without lodging a disclosure document (s 727(1); • accepting applications within the 7- or 14-day waiting period after lodgment of the disclosure document (s 727(3)); and • issuing or transferring securities in breach of the 20 investor, or the $2 million ceiling: s 727(4). Most importantly s 728 provides that a person must not offer securities under a disclosure document if there is: • a misleading or deceptive statement in the disclosure document; • an omission from the disclosure document of material required by the content rules set out in ss 710 – 715; or 870 [18.220]

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• a new circumstance that has arisen since the disclosure document was lodged, which would have been required to be included in the disclosure document had it arisen before the disclosure document was lodged. In relation to forecasts and other forward-looking statements, a person is taken to make a misleading statement if the person does not have reasonable grounds for making the statement: s 728(2). This generally requires the person making the statement to spell out the assumptions underlying the making of the forward-looking statement and identifying any risks that might mean that the forecast or other prediction is not met. See “RG 170: Prospective Financial Information” discussed at [18.120].

Criminal liability: Corporations Act [18.230] A breach of s 728 will constitute a criminal offence (s 1311) only if the misleading or deceptive statement, the omission or the new circumstance is “materially adverse” from the point of view of the investor: s 728(3). This indicates that it is the failure to reveal or to disclose fully any “bad news” that can give rise to criminal liability. Penalties for breach of s 728 are set out in Sch 3 of the Act. Higher penalties apply to companies: s 1312.

Civil liability: Corporations Act [18.240] Where there is a breach of s 728, any person who suffers loss because of the breach may recover the amount of loss or damage from a person specified in the legislation, if the loss or damage is one for which the legislation makes the person liable. The reference to “because of” indicates that there must be a causal nexus between the breach and the loss suffered. Section 729(1) contains the following Table setting out who can be liable and for what they can be liable. SECTION 729(1) (ABRIDGED) Right to recover for loss or damage resulting from contravention People liable on disclosure document [operative] These people …

are liable for loss or damage caused by …

1 the person making the offer

any contravention of s 728(1) in relation to the disclosure document 2 each director of the body any contravention of s 728(1) in making the offer relation to the disclosure document any contravention of s 728(1) in 3 a person named in the disclosure document with their relation to the disclosure consent as a proposed director… document

[18.240] 871

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People liable on disclosure document [operative] 4 an underwriter (but not a any contravention of s 728(1) in sub-underwriter)… relation to the disclosure document the inclusion of the statement in 5 a person named in the disclosure document with their the disclosure document consent as having made a statement: (a) that is included in the disclosure document; or (b) on which a statement in the disclosure document is based 6 a person who contravenes, or is that contravention involved in the contravention of, s 728(1)

This indicates that liability for a defective disclosure document is most likely to arise for the issuing body, its directors and the underwriter. Other people, such as financial advisers, accountants, lawyers or other experts, are only liable for statements in the disclosure document that they have made, or that are based on their statements, and they have consented to being named in relation to the particular statement. Liability is also imposed on any person “involved in the contravention”. The circumstances in which a person will be involved in the contravention include where a person has aided or abetted the contravention, or been knowingly concerned in, or a party to, the contravention: s 79. This requires knowledge of the essential facts and some element of involvement: Yorke v Lucas (1985) 158 CLR 661; ASIC v Somerville (2009) 77 NSWLR 110.

Defences [18.250] All people involved in the preparation of a disclosure document will have defences available, but the defences will vary depending on the type of disclosure document. The defences are available for potential civil liability and for potential criminal liability arising from contravention of s 728.

Due diligence defence [18.260] All people with potential liability for a defective prospectus can rely on what is called the “due diligence” defence. Section 731 provides that a person will not be liable under s 729 (civil liability) and will not be criminally liable, if they prove that they: • made all inquiries (if any) as were reasonable in the circumstances; and • believed on reasonable grounds that the statement was not misleading or deceptive. 872 [18.250]

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Similarly, a person will not be liable for an omission if they made all reasonable inquiries and believed on reasonable grounds that there was no omission from the prospectus. The making of reasonable inquiries to ensure that the prospectus is accurate and complete is commonly referred to as exercising “due diligence”. A similar provision in the Trade Practices Act 1974 (Cth) (now replaced by the Competition and Consumer Act 2010 (Cth)) was interpreted in Universal Telecasters (Qld) Ltd v Guthrie (1978) 18 ALR 531 at 534, to require: • a proper system to provide against contraventions; and • adequate supervision to ensure that the system was carried out. In relation to fundraising, this has resulted in the establishment of due diligence committees, comprising representatives of those involved in preparation of the prospectus. The aim is to ensure that all statements appearing in the prospectus are accurate and that the prospectus is complete. This is often a time-consuming and costly exercise.

Lack of knowledge defence [18.270] All people with potential liability for an offer information statement or a profile statement can rely on the lack of knowledge defence: s 732. That is, they will not be liable in relation to a misstatement if they prove that they did not know that the statement was misleading or deceptive or, in relation to an omission, that they did not know there was an omission. This defence will be much easier to satisfy because there is no requirement to undertake reasonable inquiries.

General defences [18.280] There are also three general defences available to all people with potential liability for all types of disclosure documents. The first is the “reasonable reliance” defence which is available if a person places reasonable reliance on information given to them by someone who is not a director, agent or employee: s 733(1) and (2). This could apply if the person places reliance on information provided by an expert or an official person. The second general defence is the “withdrawal of consent” defence. This is available to a person other than a director if they prove that they publicly withdrew their consent to being named in the disclosure document: s 733(3). The third general defence is the “unawareness” defence. Under this defence, a person will not be liable because of a new circumstance that has arisen since the disclosure document was lodged if the person proves that they were not aware of that matter: s 733(4).

Civil action – general law [18.290] Under the general law there are several remedies for misrepresentation. These remedies are in addition to the statutory remedies already considered. [18.290] 873

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Although people would usually rely on those statutory remedies, it is expressly stated that the statute does not affect any liability a person has under any other law. It is therefore necessary to be aware of other remedies.

Rescission [18.300] Generally, rescission is available for misrepresentation in a disclosure documentonly if the person bringing the action (the plaintiff) is an applicant for shares rather than a purchaser from someone else. The right to rescission will be lost if the contract is affirmed (for example, if dividends are freely accepted), or if full restitution is not possible.

Damages for fraudulent misrepresentation [18.310] Damages will be available where a misrepresentation in a disclosure document is fraudulent but will be limited to the amount needed to right the wrong done – the plaintiff cannot get damages for expected future gains.

Damages for negligent misrepresentation [18.320] Liability in tort may arise from a misrepresentation which is carelessly made. There must be a duty of care owed and the maker of the statement must have foreseen that the other party would rely on the statement: see Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465; L Shaddock & Associates Pty Ltd v Parramatta City Council (No 1) (1981) 150 CLR 225; Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (No 6) (2007) 63 ACSR 1.

Proposed disclosure regime for crowd-sourced funding offers [18.330] The Corporations Amendment (Crowd-sourced Funding) Bill 2015 (Cth) proposed to introduce a new part into Ch 6D to facilitate crowd-sourced funding by establishing a separate disclosure regime for certain offers of securities for issue in small, unlisted public companies (“CSF offers”). As already noted the Bill lapsed on the calling of the double dissolution election in May 2016 but may be reintroduced. The crowd-sourced funding amendments would allow a large number of people to make a small investment in a company. According to the Explanatory Memorandum, crowd-sourced funding would give small businesses and start-ups an additional funding option, and it would provide more investment opportunities to retail investors, who are generally unable to gain direct access to early-stage financing activities. Under the Bill a CSF offer is an offer that meets certain requirements: • the offer is for the issue of securities of the company making the offer (a CSF offer can only cover primary issues); • the company making the offer is an “eligible CSF company” at the time of the offer; • the securities satisfy the eligibility conditions specified in the regulations; 874 [18.300]

Fundraising

| TOPIC 18

• the offer complies with the “issuer cap” ($5 million); and • the company does not intend the funds sought under the offer to be used by the company or a related party of the company to invest in securities or interests in other entities or managed investment schemes (proposed s 738G). An “eligible CSF company” means a public company limited by shares, with its principal place of business and majority of directors in Australia; the company must satisfy gross assets and turnover caps; the company (or any related party) must not be a listed corporation or have a substantial purpose of investing in securities or interests in other entities or managed investments schemes (proposed s 738H). The regime requires a “CSF offer document” to be prepared for each CSF offer and this document must contain all the information specified in the regulations (proposed s 738J). A CSF offer document must be published on a platform of a single “CSF intermediary” (a financial services licensee whose license expressly authorises the licensee to provide crowd-sourced funding) in order to make a CSF offer of a company’s securities (proposed s 738L). The information in a CSF offer document must be worded and presented in a clear, concise and effective manner (proposed s 738K). A company making a CSF offer would be able to offer securities of the same class pursuant to an offer that is exempt from disclosure under s 708 (proposed s 738A). This would allow a company to make a CSF offer of shares via an intermediary to crowd investors, as well as making an offer of shares to investors for whom disclosure is not required. The proposed amendments also include prohibitions, liabilities and investor protections applying to CSF offers, including rules relating to defective disclosure documents and advertising restrictions. ASIC’s powers in relation to offers of securities (such as the power to make a stop order) would also be amended so that they apply to CSF offers.

Further Reading Ancev T “Equity Crowdfunding in Australia: A Regulatory Balancing Act” (2015) 33 C&SLJ 353 Austin RP and Ramsay IM Ford, Austin and Ramsay’s Principles of Corporations Law, 16th ed, LexisNexis, 2015, Ch 22 Boros E “Corporations Online” (2001) 19 C&SLJ 492 Calleja N “Current Issues Relating to Prospectus Advertising and Securities Hawking” (2000) 18 C&SLJ 23 Ciro T “Misleading and Deceptive Conduct in Capital Markets” (1999) 5 NZBLQ 80 Hood A and Boswell D “Due Diligence Reviews for Fundraisings Under the Corporations Law” in Walker, Fisse and Ramsay (eds) Securities Regulation in Australia and New Zealand, LBC Information Services, 1998 [18.330] 875

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Karl A, Kazakoff A and Chapple L “Market Responses to Offer Information Statements” (2003) 21 C&SLJ 231 Kyrwood J “Disclosure of Forecasts in Prospectuses” (1998) 16 C&SLJ 350 Lipton P, Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, Ch 7 North G “Companies Take Heed: The Misleading or Deceptive Conduct Provisions are Gaining Prominence” (2012) 30 C&SLJ 342 Peters C “Revisiting the Regulation of SME Fundraising” (2006) 24 C&SLJ 319. Stace V “Are Directors Liable in Negligence for Misstatements in a Prospectus?” (2016) 34 C&SLJ 48.

876 [18.330]

TOPIC 19 External Administration Introduction.................................................................................... [19.10] Receivership .................................................................................... [19.310] Liquidation (Winding Up) .................................................................. [19.130] Schemes of arrangement ................................................................... [19.420]

Extract from J Yogaratnam and L Xynas, Corporations Law: In Principle (10th ed, Lawbook Co., 2017), Chapter 24.

Recent Developments Cases Lehman Brothers Holdings Inc v City of Swan (2010) 240 CLR 509 Carey v Korda [2012] 45 WAR 181 Re Nine Entertainment Group Ltd (No 1) [2012] FCA 1464 Re Nine Entertainment Group Ltd (No 2) [2013] FCA 40 Southern Engineering Services Pty Ltd (in liq) [2014] NSWSC 1882 Grant Samuel Corporate Pty Ltd v Fletcher: JP Morgan Chase Bank, National Association v Fletcher [2015] HCA 8

Legislation Insolvency Law Reform Act 2016 (Cth) Introduced in February 2016, this Act has made significant reforms to insolvency laws in Australia. The Act has amended the ASIC Act, the Corporations Act and the Bankruptcy Act. Broad changes include: • One category only for “corporate insolvency practitioner”, where the distinction between official and registered practitioners is no longer made; • Corporate insolvency practitioners requisite experience reduced from 5 years to 3 years; • Amendments to registration requirements for corporate insolvency practitioners; • Increases in penalties for corporate insolvency practitioners who do not hold required indemnity and fidelity insurances; • Changes to remuneration for corporate insolvency practitioners; • Increased powers for ASIC in the monitoring and auditing of administrations conducted by corporate insolvency practitioners; and 877

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• Changes to creditors rights in external administrations including the removal of a corporate insolvency practitioner and the appointment of a replacement via an ordinary resolution.

Aim At the end of this Topic you should know: • the options available when a company is in financial difficulty; • the phases in the voluntary administration process; and • how administrators, controllers and liquidators are appointed and the nature of their respective powers and duties.

PRINCIPLES Introduction [19.10] There are several ways of dealing with companies in financial difficulties. They are: • voluntary administration; • receivership with the appointment of a receiver or controller; • liquidation (or winding up); and • a creditors’ scheme of arrangement. Terminology commonly used in explaining these processes includes: • creditor: a person (including a company) that is owed money by the company; • secured creditor: a creditor of the corporation, if the debt owing to the creditor is secured by a security interest: s 51E, Corporations Act. • secured Interest: a term used to describe certain types of mortgages and other securities that may be given by a company over its property (see Topic 17 and the definition of “security interest” in s 51A of the Corporations Act 2001 (Cth) (Corporations Act)); and • insolvent: the solvency of a company is determined by reference to what is sometimes described as a “cash flow” test – a company may have many valuable assets that together exceed its debts, but if it cannot easily turn those assets into cash (by sale or borrowing) and does not otherwise have enough cash to pay its day to day expenses, it will be insolvent.

878 [19.10]

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| TOPIC 19

See s 95A of the Corporations Act: SECTION 95A Solvency and insolvency (1)

A person is solvent if, and only if, the person is able to pay all of the person’s debts, as and when they become due and payable.

(2)

A person who is not solvent is insolvent.

Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act) [19.12] Chapter 11—External administration of the CATSI Act. The Registrar of ORIC has a number of regulatory and enforcement powers under the CATSI Act. In order to monitor the governance of a company, the Registrar may conduct the following:

• Examination: a regular assessment of the governance standards of corporation.

• Compliance notices: corporations that do not comply with the CATSI Act or the rule book may be issued with warnings.

• Special administrations: where corporation has difficulty in resolving internal problems and/or there is no further recourse by directors of the corporation, the Registrar of ORIC can take steps to assist the corporation.

• Liquidation - where the Registrar may provide support to collapse and deregister corporations which, inter alia, cease to operate. An example of where the Registrar assisted a corporation in deadlock through special administration is in relation to Gulf Savannah NT Aboriginal Corporation. Extract from the ORIC’s website: http://oric.gov.au/publications/media-release/ restructure-breaks-deadlock-gsnt.

MR1516-21 – Restructure breaks deadlock at GSNT [19.14] The Registrar of Indigenous Corporations, Anthony Beven, today announced the end of the special administration of the Gulf Savannah NT Aboriginal Corporation (GSNT). The corporation was established in 2013 as a joint venture between the Mabunji Aboriginal Resource Indigenous Corporation (Mabunji) and the Mungoorbada Aboriginal Corporation (Mungoorbada). Based in Borroloola in the Gulf region of the Northern Territory, GSNT delivers essential services to the region through the Commonwealth-funded Community Development Programme (CDP). In February 2016, following a dispute between its corporate members, the corporation wrote to the Registrar requesting help. [19.14] 879

Business and Corporate Law

On 26 February 2016 the Registrar appointed Mr Gerry Mier and Mr Tony Jonsson from the Queensland-based firm of Grant Thornton Australia as the special administrators of the corporation. To resolve the deadlock the special administrators changed the corporation’s rule book by introducing a more conventional structure based on individual membership. “The dispute between its former corporate members placed GSNT’s operations at serious risk,” said Mr Beven. “The changes made by the special administrators have enabled GSNT to once again focus on the important employment and training services it provides to the community.” The special administrator also introduced a new staffing structure and an independent director position to the GSNT board. The new board of directors will meet for the first time on 8 June 2016. The Registrar will monitor the corporation closely over the next 12 months and will provide corporate governance training to the new directors as soon as practical.

Voluntary administration [19.20] The object of voluntary administration is to give a company in financial difficulties (or its business) a chance of survival or, if this is not possible, to maximise the return to its creditors. For this reason, it is a popular form of external administration, particularly for the directors of a financially distressed company: s 435A, Corporations Act. SECTION 435A Object of Part The object of this Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that: (a)

maximises the chances of the company, or as much as possible of its business, continuing in existence; or

(b)

if it is not possible for the company or its business to continue in existence--results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.

If a company in voluntary administration is able to trade out of its difficulties then it is usually because the creditors vote for a deed of company arrangement (DOCA) under which they agree to defer or reduce (or both) the debts owed by the company. Where this does not occur, it may be because a secured creditor appoints a receiver who usurps the role of the administrator, or because the creditors vote for liquidation. 880 [19.20]

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| TOPIC 19

Appointment of an administrator [19.30] Under voluntary administration, an administrator, under ss 436A – 436C will be appointed by: • the directors: s 588H(5)(6); or • a company liquidator or provisional liquidator; or • a creditor who has a security interest in the company An administrator must be a registered liquidator (s 1282, Corporations Act) who is independent of the company: ss 448A – 448D and 436DA, Corporations Act. The administrator’s appointment must be publicised in a relevant manner and notice lodged with ASIC. See https://www.insolvencynotices.asic.gov.au. A company under administration (or deed of company arrangement) must disclose that fact in all public documents (by adding to its name, “administrator appointed” or “under deed of company arrangement” – as the case may be): s 450E, Corporations Act. The administrator’s job is to investigate the financial position of the company and decide on a course of action that is in the best interests of the creditors: s 438A, Corporations Act. SECTION 438A Administrator to investigate affairs and consider possible courses of action As soon as practicable after the administration of a company begins, the administrator must: (a)

investigate the company’s business, property, affairs and financial circumstances; and

(b)

form an opinion about each of the following matters: (i)

whether it would be in the interests of the company’s creditors for the company to execute a deed of company arrangement;

(ii)

whether it would be in the creditors’ interests for the administration to end;

(iii)

whether it would be in the creditors’ interests for the company to be wound up.

Administrator as agent of the company [19.40] In order to carry out the investigation, the administrator effectively displaces the directors, whose powers are suspended (s 437C, Corporations Act), and is given wide powers to take control of the company’s business: ss 437A and 442A, Corporations Act. [19.40] 881

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The administrator effectively takes on the role as agent of the company and has wide ranging powers to carry on the business of the company. This can sometimes take many years. For example, the administration of Ansett took nearly 10 years to complete. See KordaMentha 2011, The battle to save Ansett, at Our Stories (http:// www.kordamentha.com/our-stories/ansett-australia).

Creditors Meetings [19.50] An administrator must within 30 business days of the commencement of administration, hold two creditors meetings. The first meeting is to be held within the first 8 days: s 436E(2), Corporations Act; and the second meeting is held generally within the first 25 days from the commencement of the administration: s 439A(5)(b), Corporations Act. SECTION 436E Purpose and timing of first meeting of creditors (1)

(2)

The administrator of a company under administration must convene a meeting of the company’s creditors in order to determine: (a)

whether to appoint a committee of creditors; and

(b)

if so, who are to be the committee’s members.

The meeting must be held within 8 business days after the administration begins.

SECTION 439A Administrator to convene meeting and inform creditors (1)

The administrator of a company under administration must convene a meeting of the company’s creditors within the convening period as fixed by subsection (5) or extended under subsection (6). …

(5)

The convening period is: (a)

(b)

if the day after the administration begins is in December, or is less than 25 business days before Good Friday–the period of 25 business days beginning on: (i)

that day; or

(ii)

if that day is not a business day–the next business day; or

otherwise–the period of 20 business days beginning on: (i)

882 [19.50]

the day after the administration begins; or

External Administration

(ii) (6)

| TOPIC 19

if that day is not a business day–the next business day.

The Court may extend the convening period on an application made during or after the period referred to in paragraph (5)(a) or (b), as the case requires.

At the second meeting the creditors pass a resolution under s 439C of the Corporations Act which will set out: • the execution of a deed of company arrangement (DOCA;) or • the commencement of a winding up; or • the ending of the administration with control reverting back to the company directors. The time limits imposed for the steps in the voluntary administration are stringent. Some of the time limits can be extended by application to the court (including the 20 business day limit for the second meeting: s 439A(6), Corporations Act) but courts will not encourage extensions: see Mann v Abruzzi Sports Club Ltd (1994) 12 ACLC 137 and the factors relevant to granting an extension Re Riviera Group Pty Ltd (admins apptd) (recs & mgrs apptd) (2009) 72 ACSR 352. The administrator must submit a detailed report to creditors (s 439A(4), Corporations Act) when giving notice of the second meeting, including a statement of the administrator’s opinion about each of the options referred to in s 438A of the Corporations Act. Voting at meetings of creditors is by simple majority of those present (in person and by proxy) and voting. If a poll is demanded (see Topic 11), a resolution will be carried if it receives the support of a majority of creditors voting where those creditors also control more than half of the debt owed by the company. If the majority of those present and voting vote one way, and those controlling more than half of the debt owed by the company vote the other, the Chair (usually the administrator) has the casting vote: reg 5.6.21, Corporations Regulations 2001 (Cth).

Rights of substantial secured party [19.60] A secured party with a security interest over the whole or substantially the whole of a company’s property who has that interest perfected, within the meaning of the Personal Property Securities Act 2009 (Cth), at the time the enforcement starts, plays an important role in a voluntary administration. In addition to having power to appoint an administrator, a person who holds a substantial perfected security interest must be given notice of the appointment of an administrator on the next business day after the appointment: s 450A(3), Corporations Act. [19.60] 883

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A substantial secured party can effectively opt out of the administration by enforcing its secured interest either before the administrator is appointed, or at any time within the first 13 business days of the administration (the decision period): ss 9 and 441A, Corporations Act.

Protection from creditors [19.70] This is one of the most important features of the voluntary administration procedure, as it enables the administrator to assess the future viability of the company without the distraction of creditors chasing debts, repossessing equipment and so on. During the period of administration, the company is protected from actions by creditors – there is a moratorium or “freeze” on creditors bringing court actions, winding up proceedings and other claims: ss 440A – 440G, Corporations Act. The moratorium even extends to claims under a guarantee given by a director or a relative of a director: s 440J, Corporations Act. Owners of property in the possession of the company (for example, a landlord or the lessor of a vehicle or a piece of machinery) and those with securities over property of the company are, with exceptions, also affected by the moratorium. The exceptions are: • substantial secured party with a perfected interest under the PPS Act; and • secured creditors and owners who act before the administration begins, and where perishable property is involved: ss 441A – 441G, Corporations Act. Subject to the terms of any deed of company arrangement entered into by the company and creditors, the moratorium will end, and all rights of creditors will be restored, after the conclusion of the second meeting of creditors.

Liabilities of administrators [19.80] Administrators are officers of the company, with all the liabilities that entails: see Topic 13. Administrators are also personally liable for certain categories of debts incurred during the administration period. SECTION 443A General debts (1)

884 [19.70]

The administrator of a company under administration is liable for debts he or she incurs, in the performance or exercise, or purported performance or exercise, of any of his or her functions and powers as administrator, for; (a)

services rendered; or

(b)

goods bought; or

External Administration

(2)

| TOPIC 19

(c)

property hired, leased, used or occupied, including property consisting of goods that is subject to a lease that gives rise to a PPSA security interest [for meaning see s 51] in the goods; or

(d)

the repayment of money borrowed; or

(e)

interest in respect of money borrowed; or

(f)

borrowing costs.

Subsection (1) has effect despite any agreement to the contrary, but without prejudice to the administrator’s rights against the company or anyone else.

An administrator is also liable, from the period beginning more than five business days after the administration began, for payments under arrangements entered into before the administration began relating to the use of property owned by someone else, such as rented premises or leased equipment. However, payments under pre-existing obligations can be avoided or limited by the administrator ceasing to use the property and serving a notice on the owner: ss 443A – 443B, Corporations Act. See Carey v Korda [2012] 45 WAR 181 where a number of rights and obligations of an administrator were explained and clarified.

Administrator's indemnity [19.90] Administrators have a right of indemnity out of the assets of the company for all debts for which they are liable: s 443D, Corporations Act. Further, the right of indemnity enjoyed by an administrator has priority over all other debts of the company (with certain exceptions relating to secured creditors), and is itself secured by a lien over the company’s property: ss 443E – 443F, Corporations Act.

Deed of Company Arrangement (DOCA) [19.100] If, at the second meeting, the creditors decide on a deed of arrangement, (DOCA) an administrator (usually the originally appointed administrator) must draw up the deed according to s 444A of the Corporations Act. The deed must be authorised and executed by the company and the administrator according to s 444B of the Corporations Act. The statutory moratorium or “freeze” on the company’s liabilities ends with the second meeting of creditors. A moratorium will exist under a deed of company arrangement only to the extent that the deed itself provides. It is important to distinguish clearly between these two phases of an administration – one relying on statute and the second relying, in essence, on contract. Note, the DOCA can only limit the rights of secured creditors, owners and lessors to the extent that: [19.100] 885

Business and Corporate Law

• it contains provisions affecting those rights; and • the relevant secured creditor, owner or lessor votes in favour of the deed (or the court otherwise orders): s 444D(2) and (3), Corporations Act. In theory, a deed of company arrangement can discriminate between different creditors or categories of creditors. However, as a general rule, a deed that provides for distributions among creditors that departs significantly from the regime that would apply under a winding up is likely to be susceptible to an application to the court by the creditor(s) concerned that it be terminated: s 445D, Corporations Act; and Lam Soon Australia Pty Ltd (admin apptd) v Molit (No 55) Pty Ltd (1996) 70 FCR 34; Expile Pty Ltd v Jabb’s Excavations Pty Ltd (2004) 22 ACLC 667; Commonwealth v Rocklea Spinning Mills Pty Ltd (2005) 145 FCR 220. In Lehman Brothers Holdings Inc v City of Swan (2010) 240 CLR 509, the court held that a DOCA could not bind creditors to give up rights as against third parties. Employees must be considered if a deed is contemplated and the deed must contain a provision that they are given at least an equal priority to what they receive in winding up. The employees at a meeting or the court can waive this requirement: s 444DA(1) and (2), Corporations Act.

Section 447A(1) – the administrator's “cure-all” [19.110] Section 447A(1) of the Corporations Act is an unusual provision that appears to confer on the courts a wide-ranging power to adapt the operation of Pt 5.3A of the Corporations Act to suit the needs of a particular administration. SECTION 447A(1) General power to make orders (1)

The Court may make such orders as it thinks appropriate about how this Part is to operate in relation to a particular company.

Administrators have shown an increasing tendency to resort to this section to overcome the strict application of time limits and to mould Pt 5.3A of the Corporations Act to better suit the needs of administrations of large corporate groups, such as Ansett and Pasminco. Although doubts have been expressed about the full ambit of the power, these were considered in the decision of the High Court in Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270. Australasian Memory v Brien [19.115] Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270 (High Court of Australia) FACTS: The administrators convened (in the sense of gave notice of) the second meeting of creditors of the company within the 21-day “convening period” (as previously required), but the date nominated for the holding of the meeting was not “within five business days of the end of the convening period”

886 [19.110]

| TOPIC 19

External Administration

(as previously required): s 439A(2). Instead, it was held eight days before the end of the period. The meeting was adjourned for about three weeks and the creditors then resolved that the company be wound up. The liquidators later served statutory demands on two debtors of the company, who applied to have the demands set aside by attacking the validity of the resolutions that effected the appointment of the liquidators. The liquidators sought to overcome the procedural defect in the holding of the meeting by resort to (among other things) s 447A. It was argued that, because s 439A(6) made provision for the variation of the meeting timetable, the otherwise general provision of s 447A(1) should not be construed as having permitted the making of orders for variation in circumstances other than those that were provided in s 439A(6). DECISION: In a unanimous decision, the High Court (Gleeson CJ, McHugh, Gummow, Hayne and Callinan JJ) held that nothing on the face of s 447A suggested that it should be read down. In its terms, it enables the making of orders which alter the way in which “this part is to operate in relation to a particular company”. The High Court upheld the order of the court below that had the effect of altering the requirement imposed by s 439A(2) to hold the meeting after the end of the convening period. The court also found that, while the section looked to the future, this requirement did not prevent the making of orders with future effect but in respect of past matters or events. The court left open the question of whether the section could be used in a way that affected rights that had already vested.

Transition to winding up [19.120] The company and its creditors may resolve to wind up the company at various stages of the administration – for example, at the second creditors’ meeting or at a meeting terminating the deed of arrangement. Transition to winding up can also occur under s 446A of the Corporations Act when certain deadlines are not met. Section 446A of the Corporations Act deems the company to have taken the steps required to implement a voluntary winding up.

Liquidation (Winding Up) [19.130] Most companies that go into liquidation are hopelessly insolvent. The process of liquidating a company is also known as “winding up”. Parts 5.4 – 5.9 of the Corporations Act 2001 (Cth) cover winding up requirements. The administration of the winding up process is undertaken by a liquidator: ss 1279, 1282 and 1283, Corporations Act.

Types of Winding Up [19.135] There are two types of winding up: • compulsory or by court order: ss 459A – 489E, Corporations Act; or • voluntary: ss 489F – 511, Corporations Act [19.135] 887

Business and Corporate Law

Sections 513 – 581 of the Corporations Act contain provisions relating to both kinds. Sections 588C – 588Z of the Corporations Act provide mechanisms that enable liquidators to improve returns to creditors in a winding up (notably, through recovery of voidable transactions and by insolvent trading claims against directors). Sections 589 – 600H of the Corporations Act provide for offences and contain some important miscellaneous provisions applicable to winding up and certain other forms of external administration.

Voluntary winding up [19.140] There are two forms of voluntary winding up: • by members: ss 495 and 496, Corporations Act; and • by creditors: ss 497 – 500, Corporations Act. Sections 490 – 494 and 501 – 511 of the Corporations Act contain provisions relating to both forms. The type of voluntary winding up depends on whether the company is solvent. For a members’ voluntary winding up the company must be solvent. A special resolution resolving to wind up the company must be passed: s 491, Corporations Act. The members can then appoint a liquidator: s 495, Corporations Act. Usually, the liquidator is a registered liquidator but in a members’ voluntary winding up of a proprietary company, the liquidator need not be and can be an officer of the company: s 532(4), Corporations Act. The directors have to attest to the company’s ability to pay its debts and must lodge a declaration and statement of affairs with ASIC: s 494, Corporations Act. A creditors’ voluntary winding up occurs when the company is insolvent. To initiate a creditors’ voluntary winding up, the company must convene both a meeting of members and a meeting of creditors. In most cases, the creditors will appoint the liquidator and control the liquidator’s conduct. A members’ voluntary winding up can become a creditors’ voluntary winding up if it is discovered (usually by the liquidator) that the company cannot pay its debts. The voluntary administration provisions establish a mechanism under which a company under administration or deed of company arrangement can, on certain given events, move into a creditors’ voluntary winding up. Under that mechanism, the company is deemed to have held the necessary meetings of members and creditors: s 446A, Corporations Act.

Compulsory or by Court Order [19.150] There are two types of compulsory or court winding up – winding up “in insolvency” and winding up “on other grounds”. Thus, not all companies wound up by the court are insolvent. But the reality is that the vast majority are insolvent, and most of these proceedings are initiated with the service of a statutory demand under s 459E of the Corporations Act. 888 [19.140]

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| TOPIC 19

Winding up in insolvency [19.160] Section 459P of the Corporations Act lists the people who can apply to the court to have the company wound up because of insolvency. Included are the company itself, creditors, liquidators and provisional liquidators, members and ASIC. (Members come under the definition of “contributory” contained in s 9 of the Corporations Act). Leave of the court may have to be obtained. The application procedure is set out in s 459Q of the Corporations Act. Applicants must advertise that they have filed an application and give notice to ASIC. Most applications are made by creditors on the basis that the company is insolvent. Under s 459C(2) of the Corporations Act a company is presumed to be unable to pay its debts if (among others) one of the events below occurs up to three months before the application is made: • the company fails to comply with a statutory demand; • a judgment order in favour of creditor is not satisfied; or • a receiver and manager is appointed under the terms of an instrument relating to a circulating security interest. A statutory demand is a demand in the prescribed form requiring the company to pay a debt that is due and payable to the creditor at the time the demand is served. The debt must be for the statutory minimum of $2,000 or more. The company is presumed insolvent if the creditor serves the demand (in the manner required by s 109X of the Corporations Act) and the company fails, within 21 days after service, to: • pay the sum demanded; • make arrangements to pay which satisfy the creditor; or • apply to the court to have the demand set aside: s 459F, Corporations Act. Applications to have a statutory demand set aside are regulated by ss 459G – 459N of the Corporations Act and will usually rely on a genuine dispute as to whether the debt is owing, or an off-setting claim. The consequences of failing to apply (within the 21 days) to have the demand set aside are very serious. The company is effectively prevented from opposing any subsequent winding up application, except by proving it is solvent (that is, able to pay its debts as and when they become due and payable): s 459S, Corporations Act. The significant divergence of views between courts on whether the 21-day period could be extended using s 1322 of the Corporations Act was finally resolved in the negative by the High Court in David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265. Other grounds

[19.170] Petitioners listed in s 462(2) of the Corporations Act may apply to the court to have the company wound up if one of the grounds contained in s 461 [19.170] 889

Business and Corporate Law

is established. Grounds such as oppression of the minority (s 461(1)(e) – (g), Corporations Act) are dealt with in Topic 14. Other grounds include: • the company passes a special resolution to compulsorily wind up (s 461(1)(a), Corporations Act); • the company fails to commence business or ceases operations for a year or more (s 461(1)(c), Corporations Act); • the company has no members (s 461(1)(d), Corporations Act); • ASIC reports that the company should be wound up (s 461(1)(h), Corporations Act); and • the court is of the opinion that it is “just and equitable” that the company be wound up (s 461(1)(k), Corporations Act). SECTION 462 Standing to apply for winding up (1)

A reference in this section to an order to wind up a company is a reference to an order to wind up the company on a ground provided for by section 461.

(2)

Subject to this section, any one or more of the following may apply for an order to wind up a company: (a)

the company; or

(b)

a creditor (including a contingent or prospective creditor) of the company; or

(c)

a contributory; or

(d)

the liquidator of the company; or

(e)

ASIC pursuant to section 464; or

(f)

ASIC (in the circumstances set out in subsection (2A)); or

(h)

APRA.

Effect of winding up On creditors

[19.180] After commencement of winding up, any disposal of the company’s property, other than exempt dispositions, is void: s 468(1), Corporations Act. This can mean hardship for people who are not aware that winding up has commenced – for example, a person who has paid for goods in cash but not yet received them. The liquidator holds the goods and the creditor then has to stand in line with all other creditors. Under s 468(3) of the Corporations Act, the court has a discretion to validate transactions. 890 [19.180]

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Secured creditors’ rights are unaffected, but other creditors cannot enforce any judgments or orders. Legal proceedings can only be brought against the company with leave of the court. On the company

[19.190] The company continues to exist as a legal entity, but cannot carry on business except for the purpose of winding up. All company documents must bear the words “in liquidation” after the name of the company. In both a voluntary and compulsory winding up, the directors lose their powers to manage the company. The liquidator manages the company: s 471A, Corporations Act. Members cannot transfer shares: s 468A(1), Corporations Act On members

[19.200] Members will not be able to transfer their shares unless the court or liquidator approves: s 468A(1), Corporations Act; and any alterations to their status will be void: s 468A(8), Corporations Act. Members lose the power to exercise control over the management of the business such as their power to remove directors or change the name of the company. Members will lose their rights to take action for oppressive conduct (see Topic 14) although s 536(1) of the Corporations Act gives access for complaint to the courts or ASIC. On employees

[19.210] Publication of a winding up order under a compulsory winding up serves as a notice of dismissal on employees: see Re General Rolling Stock Co (1872) 7 Ch App 646. The liquidator can waive this for a limited period. Under a voluntary winding up, the employees are not necessarily dismissed: see Re Matthew Bros [1962] VR 262. On contracts

[19.220] Contracts will remain on foot until the liquidator performs, repudiates or disclaims them, s 568 of the Corporations Act, although it is possible that the terms of the contract have contemplated the eventuality of liquidation. The court can make orders to discharge or rescind contracts involving the liquidated company: s 568(9), Corporations Act.

Powers and duties of liquidators [19.230] In general terms, the liquidator controls the company. As an agent of the company the liquidator is bound by fiduciary duties which are supplemented by s 232 of the Corporations Act, given that the liquidator is also an officer of the company. A liquidator must act “faithfully and fairly”. See Corporate Affairs Commission v Harvey [1980] VR 669. They also have a duty of care and diligence and as such must preserve existing assets, collect assets then realise them: s 477, Corporations Act; Pace v Antlers Pty Ltd (in liq) (1998) 80 FCR 485; 26 ACSR 490. [19.230] 891

Business and Corporate Law

Next, all the assets – including, for example, amounts recovered from voidable transactions – must be distributed: • first, to secured creditors; • secondly, to preferential creditors – principally, debts and remuneration of the liquidator (and any administrators) and employee claims (s 556, Corporations Act); and • finally, to general unsecured creditors in equal shares: s 555, Corporations Act. The remainder, if any, is distributed to shareholders according to the constitution. If the constitution is silent, they share equally in a voluntary liquidation: s 501, Corporations Act.

Voidable transactions and insolvent trading Voidable transactions

[19.240] “Voidable transactions” are governed by a series of inter-linking definitions and related provisions under which a liquidator can recover money paid to creditors and reverse uncommercial dealings. An “unfair preference” is a payment to a creditor which puts the creditor in a better position than he or she would have been in if, at the time of the payment, the company had been wound up and the creditor was forced to prove for the debt in the liquidation: s 588FA, Corporations Act. An “uncommercial transaction” is defined by reference to a test of reasonableness: s 588FB, Corporations Act. Both unfair preferences and uncommercial transactions will be “insolvent transactions” if they occur when the company is insolvent or if they cause insolvency: s 588FC, Corporations Act. Finally, whether an “insolvent transaction” will be a “voidable transaction” (that is, void as against the liquidator) depends on how long before the winding up commenced it was entered into: s 588FE, Corporations Act. For example, an unfair preference that is an “insolvent transaction” will be voidable if it was entered into in the period of six months before the winding up commenced and an uncommercial transaction has a two year window if it does not involve related parties or an obstruction to creditors’ rights. “Unfair loans” (that is, loans made at extortionate interest rates or bearing extortionate fees or charges) are voidable regardless of how long before winding up they were entered into: ss 588FD and 588FE(6), Corporations Act. Defences to a voidable transaction claim

[19.250] A creditor or other person facing a claim by a liquidator that a transaction is a voidable transaction, can rely on a defence with several elements, the most difficult of which is establishing that the creditor or person had no reason to “suspect” insolvency: s 588FG, Corporations Act. 892 [19.240]

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Although it is not strictly a “defence” to a voidable transaction claim, creditors having regular dealings with a company that goes into liquidation often seek to avoid the claim on the basis that the transaction concerned is part of a “continuing business relationship”. The most common form of such a relationship is usually called a “running account”. The running account argument developed out of a line of cases recognising that where a creditor has a regular trading relationship with a company, though the company may be paying debts owing to the creditor from time to time, the creditor, in return for those payments, is adding value to the company by continuing to supply goods or services. That concept is enshrined in the legislation: s 588FA(3), Corporations Act. There has been some doubt about whether the codification of the running account concept has altered the general operation of the principle developed in the earlier line of cases. While some of those doubts have been cleared up in more recent times, debate continues, particularly in relation to tax debts: see Airservices Australia v Ferrier (1996) 185 CLR 483 (High Court); and Sands & McDougall Wholesale Pty Ltd (in liq) v Federal Commissioner of Taxation [1999] 1 VR 489.

[19.250] 893

Business and Corporate Law

[19.260] Figure 19.1: Identifying voidable transactions

Insolvent trading

[19.270] Liquidators (and ASIC) may also take action against directors who allow the company to trade when it is insolvent – see Topic 13. Insolvent trading is a breach of s 588G Corporations Act: see [13.780]–[13.844]. Similar provisions give liquidators the power to pursue a holding company in circumstances where one of its subsidiaries has engaged in insolvent trading: s 588V, Corporations Act. Section 588M of the Corporations Act empowers liquidators to bring most of the insolvent trading claims. However, individual creditors can bring claims in certain instances, with the consent of the liquidator or in default of the liquidator bringing a claim: ss 588R – 588U, Corporations Act.

894 [19.260]

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Matters applicable to voidable transactions and insolvent trading

[19.280] In both voidable transaction proceedings and insolvent trading claims: • liquidators have the benefit of certain presumptions about the fact of insolvency (s 588E, Corporations Act); and • the court has wide powers to order compensation to be paid to the company by the creditor, director or other party sued: ss 588FF, 588K, 588M and 588W, Corporations Act These voidable transactions and insolvent trading claims can be pursued using “litigation insurance”. This is a form of insurance product available to liquidators. The insurer underwrites the cost of proceedings, in return for a share of the proceeds. There has also been a greater incidence of liquidators selling other claims that the company may have against directors or third parties. These types of arrangements have generally received the endorsement of the courts: see Re Movitor Pty Ltd (in liq) (1996) 64 FCR 380; and UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd (No 2) (1996) 14 ACLC 1,610 (and at first instance at UTSA Pty Ltd v Ultra Tune Australia Pty Ltd (No 2) (1996) 14 ACLC 1,262).

Inter-relationship between the forms of external administration [19.290] Figure 24.2 at [19.300] below depicts the more typical courses that a company in financial difficulty may take. It is important to note, however, that: • there are exceptions and variations to the possibilities shown in the flowchart; and • a company that goes into liquidation or receivership is not always in financial difficulty. The flowchart also shows how the various courses interrelate – for example, a receiver may be appointed during the course of a voluntary administration; a liquidator may be appointed while a company is in receivership.

[19.290] 895

Business and Corporate Law

[19.300] Figure 19.2: Courses taken by companies in financial difficulties

Notes: 1.

A liquidator also has the power to appoint an administrator, in which case the course would switch from “Liquidator appointed” to “Administration” and then continue from there.

2.

It is unusual for a company to survive a receivership. The more typical course is that depicted by the other arrow – namely, a creditor applying to court for a winding up order, either during or after the receivership.

Receivership [19.310] Receivership is an insolvency procedure. In general terms, a receiver is appointed to collect and receive debts and other assets. Provisions regulating receivers are found in ss 416 – 434G of the Corporations Act. Receivers can be appointed by the court or by a creditor. Where a receiver has been appointed, their primary role will be to sell enough of a company’s assets subject to a security interest to repay any debts owed to the secured creditor. A receiver may also be appointed to take control over a specific piece of corporate property (collateral) that is subject to a security interest (for example – one perfected under the Personal Property and Securities Act 2009 (Cth) (PPS Act) which is subject to a loan).

Distinguishing different types of controllers [19.320] Part 5.2 of the Corporations Act 2001 (Cth) refers to receivers and other controllers. In practice, there are three different types of people that come within the definition of “controller” (s 9, Corporations Act): (a)

a receiver, or receiver and manager, of that property; or

896 [19.300]

External Administration

(b)

| TOPIC 19

anyone else who (whether or not as agent for the corporation) is in possession, or has control, of that property for the purpose of enforcing a security interest;

and has a meaning affected by paragraph 434F(b) Corporations Act (which deals with 2 or more persons appointed as controllers).

Receiver [19.330] The least common form of controller is a person appointed with power only to “receive” and not also to “manage”. It is that limitation on power that distinguishes this type of “controllership”. It is very unusual for a bank or other secured creditor to appoint someone who only has power to receive. A receiver appointed by a court is more likely to have power only to receive.

Receiver and manager [19.340] The most common is a receiver and manager. The principal distinguishing features of a receiver and manager are that they: • are an officer and (usually) the agent of the company to which they have been appointed; and • have power to manage the company (hence “and manager”).

Those in possession or control of that property [19.350] The next most common type of receiver appointed is anyone else who (whether or not as agent for the corporation) is in possession, or has control, of that property for the purpose of enforcing a security interest. For example, most security interests will include provisions under which the holder of the security interest can enforce that security interest either by appointing a receiver and manager to take possession of the assets of the company, or by themselves going into possession. If the holder of the security interest is a bank or financial institution, it will not be practical for that bank itself to take possession so it will usually appoint an agent to do so.

Reporting requirements [19.360] The Corporations Act 2001 (Cth) also defines a “managing controller” – as the term suggests, it includes a receiver and manager but not a receiver. Section 90 of the Corporations Act explains when a “receiver” is also a “manager”. Managing controllers have slightly more stringent reporting obligations than other controllers: for example, s 421A, Corporations Act. Receivers and managers (unlike other controllers) are “officers of a company”: s 9, Corporations Act (see also Topic 13). All forms of “controllership” must be acknowledged in public documents as part of the company’s name (for example, “receivers and managers appointed” or “controller acting”): s 428, Corporations Act. [19.360] 897

Business and Corporate Law

Appointment Appointment by the secured party [19.370] The security interest usually provides for the appointment of a controller if the company defaults in payment. Other events, such as the company ceasing to carry on business, failing to provide financial reports or becoming insolvent, may also trigger appointment under the security interest. Once appointed, the controller collects the property secured by the security interest, sells it and distributes the proceeds to the secured party. The appointment of a controller must comply strictly with the terms of the security interest. If it does not, the appointment may be invalid, which means that the controller becomes a trespasser and every act of the controller in getting in and selling the property of the company is unlawful. The consequences of this both for the controller and the bank that appointed the controller can be extremely serious. Any questions concerning the validity of an appointment can be resolved by an application to the court under s 418A of the Corporations Act. Most controllers will have an indemnity from the secured party in respect of any invalidity in appointment and any other liability they may incur in carrying out their duties. However, the indemnity will not cover any breach of duty or negligence.

Appointment by the court [19.380] The court may also appoint a receiver or receiver and manager: • upon application by ASIC or an “aggrieved person” under s 1323(1) of the Corporations Act; or • where the court thinks it “just and convenient”: s 37, Supreme Court Act 1986 (Vic) (and equivalent provisions in other States). (See also the rules of court that set out how the application for appointment is made and the mechanisms for supervising the appointment: for example, O 39, Supreme Court (General Civil Procedure) Rules 2015 (Vic).) A court-appointed receiver is an “officer of the court” and not an agent or an officer of the company for the purposes of the Corporations Act 2001 (Cth). The decision of the Full Court of the Victorian Supreme Court in Bond Brewing Holdings Ltd v National Australia Bank Ltd [1991] 1 VR 386 set significant limitations on the circumstances in which a court should order the appointment of receivers, at least in Victoria. In most cases, a receiver is appointed by the court to preserve or administer a particular fund or asset, and then only if the court is satisfied that an injunction prohibiting dealing with that fund or asset is not a sufficient protection. It is now very uncommon for a court to appoint a receiver to an entire company. 898 [19.370]

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| TOPIC 19

Effect of appointment [19.390] The appointment of a receiver and manager (or other managing controller) does not affect the legal personality of the company, nor does it displace the board of directors. The appointment, however, does affect the ability of the board to run the company: see Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd [1969] 2 NSWR 782. Although a privately appointed receiver and manager will generally take directions from the secured party, the security instrument will ordinarily provide that the receiver and manager acts as agent of the company. This particular form of agency means that many of the actions of a receiver and manager become the responsibility of the company, not the secured party. This is why a secured creditor (who may want the person they appoint to manage the company) generally prefers to appoint a receiver and manager rather than their own agent. However, the agency will usually terminate when a liquidator is appointed to the company, unless the receiver gets the consent of the liquidator or an order of the court permitting the receiver to retain that status. The termination of the agency does not, however, affect the receiver’s ability to exercise most of the receiver’s powers: s 420C, Corporations Act.

Powers and duties of controllers [19.400] Privately appointed controllers derive their powers from the charge instrument. Court-appointed receivers are given powers by the court. In addition, s 420 of the Corporations Act sets out numerous powers that a receiver will have, unless the charge instrument or the court order provides otherwise. Under ss 429 – 430 of the Corporations Act, controllers can obtain information in order to get in the company’s assets. Section 431 of the Corporations Act entitles receivers to inspect any books that relate to the secured property, at any reasonable time. A privately appointed controller also has duties to the company to act in good faith and, more specifically, to take all reasonable care that the property is not sold below market value where it has a market value or otherwise for the best price reasonably obtainable: s 420A, Corporations Act. Controllers also have various administrative duties relating to notices of appointment, bank accounts, maintenance of records and so on. The primary function of a privately appointed controller is to sell enough of the assets of the company to repay the bank or other secured creditor that appointed them. However, the proceeds of sale of certain assets must first be used to repay categories of “priority claims” (such as wages, leave entitlements and superannuation of employees of the company): s 433, Corporations Act. [19.400] 899

Business and Corporate Law

Liability of receivers [19.410] Under ss 419 – 419A of the Corporations Act, receivers will be liable for certain debts incurred during the course of the receivership. Those debts are, in essence, the same as those for which an administrator is personally liable. Liability can also arise by reason of a receiver and manager’s status as an officer of the company: see ss 180 – 184 and 598, Corporations Act. Section 423 of the Corporations Act deals specifically with breaches of duty by receivers. Under s 1321 of the Corporations Act any person aggrieved by an act or omission of a receiver may apply to the court for redress.

Schemes of arrangement Creditors' scheme of arrangement [19.420] Creditors’ schemes of arrangement have never been common and, following the introduction of voluntary administrations, are increasingly rare. Implementing a creditors’ scheme of arrangement requires at least two applications to court, lengthy documentation and separate meetings of various categories or “classes” of creditors. Such schemes are expensive and cumbersome. They are to be contrasted with schemes of arrangements with members, which continue to be an important tool in effecting the reorganisation or amalgamation of solvent companies.

Members' scheme of arrangement [19.430] Schemes of arrangement are used in company reconstructions and can be used in situations of insolvency. In the reconstruction scenario, arrangements are made with members, not creditors (although creditors are given consideration where the scheme involves a reduction of capital). The procedures to be adopted for creditors’ schemes of arrangement are set out in ss 411 and 412 of the Corporations Act. A company, a member or a director may apply to the court for an order that a meeting of creditors (or classes of creditors) be convened so as to initiate a scheme. If the company is being wound up, the liquidator also may apply. Prior notice must be given to ASIC. If a meeting is ordered, the company must send an explanatory statement and other relevant information to those entitled to attend: s 412, Corporations Act. The scheme becomes binding only if approved by both the required majority of creditors (usually 75%) and the court: s 411(4), Corporations Act. The scheme comes into effect after a copy of the court order approving it is lodged with ASIC: s 411(10), Corporations Act. The complex procedural requirements and court involvement make creditors’ schemes of arrangement cumbersome, slow and expensive. They are, therefore, rarely suited to a company facing a financial crisis. 900 [19.410]

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Further Reading Agardy P “Administrators, Trading and Risk” (2002) 10 Insolv LJ 164 Anderson C “Decision making in Voluntary Administration” (2004) 22 C&SLJ 163 Anderson C and Morrison D “Applications for Advice from Courts by Insolvency Practitioners” (2007) 25 C&SLJ 406 Anderson C and Morrison D The Australian corporate rescue provisions: how do they compare? (2013) in Omar, Paul (Ed.) International Insolvency Law: Reforms and Challenges. Ashgate Publishing, London, pp 159-188 Atkins S “Public Policy: the Law’s Guardian in the Clash between Insolvency and Maintenance in the Context of Litigation Funding Arrangements” (2004) 12 Insolv LJ 41 Austin RP and Ramsay I Ford’s Principles of Corporations Law, 16th ed, LexisNexis Butterworths, 2014, Chs 25-28 Barlow K “Voidable Preferences and the Running Account – The High Court Reconsiders” (1998) 26 ABLR 82 Dickfos J “Improving Outcomes for Creditors: Balancing Efficiency with Creditor Protections” (2008) 16 Insolv LJ 84 Duns J ““Insolvency”: Problems of Concept, Definition and Proof” (2000) 28 ABLR 22 Frost-Drury A, Greinke A and Shailer G “Financial Differences Between Voluntary Administrations and Liquidations” (1998) 6 Insolv LJ 153 Harris J “Corporate Group Insolvencies: Charting the Past, Present and future of “Pooling” Arrangements” (2007) 15 Insolv LJ 78 Herzberg A, Bender M and Gordon-Brown L “Does the Voluntary Administration Scheme satisfy its Legislative Objectives? An Exploratory Analysis” (2010) 18 Insolv LJ 181 Keay A “Finding a Way Through the Maze that is the Law of Statutory Demands” (1998) 16 C&SLJ 122 Lipton P, Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, Chs 22-25 McColl S “Voluntary Administrations: How Well are they Working?” (2001) 12 Australian Journal of Corporate Law 194 McCormack G and Hargovan A “Australia and the International Insolvency Paradigm” (2015) 37 Sydney L. Rev. 389 Routledge J “Part 5.3A of the Corporations Law (Voluntary Administration): Creditors’ Bargain or Creditors’ Dilemma?” (1998) 6 Insolv LJ 127

[19.430] 901

INDEX A Aboriginal customary law criminal cases [1.260] recognition [1.260] Aboriginal and Torres Strait Islander corporations business structures, [9.12] coming into existence, [9.852] corporate liability, [12.12] directors’ duties — see Directors’ duties division of powers, [13.12] external administration, [19.12] fundraising, [18.12] loan capital, [17.12] meetings, [11.12] members rights and remedies, [14.12] membership of company, [14.12] gender composition, [14.12] personalised internal rules, [10.12] Registrar of Indigenous Corporations Bunurong Land Council, and, [13.312] calling general meeting, [11.12] Canberra housing corporation, and, [13.12] external administration, and, [19.12] Githabul Nation Aboriginal Corporation, and, [13.852] Kempsey Medical Service, and, [13.312] Minimbah School, and, [13.12] North Australian Aboriginal Family Violence Legal Service Aboriginal Corporation (NAAFVLS), and, [13.1132] registration, [9.12], [9.712] “indigeneity requirement”, [9.712] separate legal entity, as, [9.852] share capital, [15.12] transactions affecting, [16.12] Acceptance agreement, as part of [2.10] communication of [2.150], [2.152] conditional [2.140], [2.142] counter-offers [2.170] definition [2.10] electronic communications [2.210] implied [2.130] information, requests for [2.170] joint promises [2.190] method of [2.120] place of [2.160] postal acceptance rule (PAR) [2.200] revocation of [2.180] rules of [2.20], [2.210] terminology [2.10] who can accept [2.110]

Account of profits copyright infringement, [8.1140], [8.1150], [8.1160], [8.1170] patent infringement, [8.2120] Accounting standards [9.660], [9.690], [13.618] margin lending reforms, [13.120] Administrative law overview [1.600] Administrative tribunals separation of powers, and [1.550] Administrator — see also Voluntary administration agent of company, as [19.40] appointment notice to ASIC [19.40] report to creditors [19.40] substantial secured party, rights of [19.60] complaints regarding [19.40] creditors’ meetings [19.50] deed of company arrangement [19.100] indemnity [19.90] investigation of affairs [19.40] liabilities [19.80] liquidator [19.300] Patrick Stevedores case [9.120], [9.150] powers and role [19.40] reliance on s 447A(1) [19.110], [19.115] case law [19.115] Advertising bait advertising [5.670] Advertisements [18.190] Agency — see also Agent common relationships [7.50] effect of relationship [7.20] operation of law, by [7.140] overview [7.10] parties to [7.10] sources of [7.60] authority given [7.70]–[7.120] operation of law [7.140] ratification [7.130] statutory regulation [7.200] termination [7.190] terminology [7.10] undisclosed principal doctrine [7.150] Agent authority of [7.70] apparent [7.120] 903

Business and Corporate Law Agent — cont corporation as principal [7.110] express [7.80], [7.90] implied [7.80], [7.100], [7.105] ostensible [7.120] capacity to act as [7.40] classifications [7.20] del credere [7.20] duties [7.160] factor [7.20] general [7.20] liabilities [7.180] principal, nature of relationship with [7.30] rights [7.170] special [7.20] statutory regulation [7.200] universal [7.20] Annual general meeting (AGM) — see also General meeting; Members’ meeting auditor — see Auditor conduct [11.90] directors’ obligations regarding [11.80] frequency [11.70] listed company [11.70], [11.90] matters considered at, [11.80], [11.85] members proposing resolutions [11.85], [11.240] questions by [11.90] notice [11.85], [11.190] contents of, [11.80], [11.85], [11.210] manner of giving [13.220] method of giving, [11.200] overview [11.70] remuneration report [11.80], [11.90] reforms, [11.85] who must hold [11.70] Anti-competitive practices acquisition of shares [5.440] authorisations for conduct [5.460] cartel conduct [5.110] case studies [5.130] prosecution of offences [5.70], [5.126] Commonwealth’s legislative power [5.80] contracts, arrangements or understandings [5.180] cartel conduct [5.130] dual listed companies [5.180] informal understandings [5.180] price fixing [5.115], [5.140], [5.150], [5.160] primary boycotts [5.190] substantially lessening competition [5.180] supplies or acquisitions [5.270] covenants [5.200] price-fixing effect [5.210] competition, concept [5.100] dual listed companies [5.180] exceptions to prohibitions [5.450] exclusive dealing [5.320], [5.340] notification of conduct [5.470] refusal to deal [5.350] third line forcing [5.360]-[5.390], [5.470] 904

export agreements [5.450] market, concept [5.90] mergers [5.440] misuse of market power [5.280] case studies [5.290], [5.300], [5.320] influence on market [5.310] predatory pricing [5.280] statutory power [5.310] substantial degree of power [5.300] trans-Tasman market [5.330] notifications of conduct [5.470] case studies [5.480] predatory pricing [5.280] price fixing [5.140] case studies [5.150], [5.160] covenants [5.210] price signalling [5.170] primary boycotts [5.190] resale price maintenance case study [5.415] evidentiary requirements [5.420] inducements [5.400] loss leadering [5.430] statement, meaning [5.420] secondary boycotts [5.230] employee organisations [5.250] international trade [5.240] lawful industrial action [5.260] substantially lessening competition [5.230] takeovers [5.440] Anton Piller orders, [8.1250] Apologies or amends civil liability legislation [6.970] Appeals civil cases [1.740] Privy Council [1.190] abolition of appeals [1.210], [1.220] state supreme courts [1.210], [1.220] ARBN (Australian Registered Body Number), [9.810] Articles of association constitution of pre-1998 company, [10.140] internal rules prior to 1 July 1998, [10.130] ASIC — see Australian Securities and Investments Commission Assault overview [6.90] Assignment copyright, [8.1030], [8.1040] Australian Performing Rights Association, [8.390] future copyright, [8.1090] trade marks, [8.2510]

| A

Index Assignment of contracts equity, in [2.820] liabilities assigned [2.800] operation of law, by [2.830] overview [2.790] rights assigned [2.810], [9.450] terminology [2.720] Association incorporated — see Incorporated association not-for-profit — see Not-for-profit association unincorporated — see Unincorporated not-for-profit association ASX — see Australian Securities Exchange ASX Listing Rules compliance with [9.630], [10.70] on-market share buy-backs [16.410] membership restrictions [14.30] transfer of shares [14.130], [14.150] ASX Trade [14.160] Auctions sale of goods legislation [4.710] Audit incorporated associations, [9.470] Auditors annual general meeting appointment at, [11.80] duty to answer questions at, [11.90] report considered at, [11.80] appointment AGM, at [11.80] general meeting, by [11.80], [13.30] duty to answer questions at [11.90], [11.450] report considered at [11.80] CLERP 9 reforms [13.90] conflict of interest [13.100] independence [13.90], [13.100] negligent misstatement [6.540] removal by general meeting [13.30] remuneration AGM, fixing at, [11.80], [11.85] report — see Auditor’s report Auditor’s report AGM, consideration at [11.80] Australia Acts [1.220] Australian Business Number (ABN) allotment on registration, [9.810] company, [9.810] overview, [9.810] partnership, [9.70] sole trader, [9.30]

use of, [9.810] Australian Capital Territory Commonwealth Constitution, power over [1.185] legal history [1.340] Australian Company Number (ACN) compliance with rules for use, [9.810] overview, [9.810] use on documents, [9.810] Australian Competition and Consumer Commission Australian Consumer Law [5.520], [5.810] authorisations of conduct [5.460] cartels, restrictions on supply [5.126] enforcement powers [5.810] functions [5.30] members [5.30] merger guidelines [5.440] misleading or deceptive conduct [5.570], carbon pricing [5.586] misuse of market power [5.310] notification of conduct [5.470], [5.480] price fixing, case [5.115] overview [5.30] review of decisions [5.40] unconscionable conduct [5.590] Australian Competition Tribunal (ACompT) overview [5.40] Australian Consumer Law background to introduction [5.490] conflicting legislation [5.490] consumer policy framework [5.490] cartels, bid rigging [5.125] commencement [5.500] Constitution, and [5.510] consumer, definition [5.560] consumer guarantees [5.720], [5.730] failure to comply [5.730] included guarantees [5.730] remedies [5.850] consumer transactions [5.720] itemised bills [5.760] proof of transactions [5.760] country of origin [5.840] criminal liability [5.800] maximum fines [5.800] defective products [5.790], [6.640], [6.730] defences [5.800] drafting [5.500] enforcement agencies [5.520], [5.940] enforcement powers [5.810] false or misleading representations [5.620] carbon price [5.650] case studies [5.630], [5.640] pre-introduction of ACL [5.660] general protections [5.570] implementation [5.500] information standards [5.780] 905

Business and Corporate Law Australian Consumer Law — cont interpretation [5.560] lay-by sales [5.720], [5.750] linked credit providers [5.860] major changes in law [5.540] manufacturer’s liability [5.790], [6.640] market sharing [5.120] overview [5.10], [5.490] price fixing [5.115], [5.140] product safety [5.770], [6.730], professional advice [6.540] regulations [5.530] remedies [5.830] consumer guarantees [5.850] pecuniary penalties [5.820] unfair contract terms [5.950] states and territories [5.490] enforcement agencies [5.520] referral of powers [5.510] specific protection [5.620] structure of ACL [5.550] consumer transactions [5.720] criminal liability [5.800] definitions [5.560] enforcement and remedies [5.810] general protections [5.570] product safety [5.770] unfair practices [5.600] supplier’s liability [5.860] unfair contract terms [5.500], [5.870] consumer contract, definition [5.880] enforcement of regime [5.940] exempt contracts [5.910] remedies [5.950] standard form contracts [5.890], [5.900] test [5.920] transparency of terms [5.930] unfair, definition [5.920] unfair practices [5.600], [5.610] definition [5.610] false or misleading representations [5.620] harassment or coercion [5.710] price of goods [5.700] pyramid schemes [5.690] rebates, prizes or gifts [5.670] referral selling [5.710] unsolicited supplies [5.680] unsolicited consumer agreements [5.720], [5.740] industry specific regulation [5.740] key concepts [5.740] Australian Energy Regulator [5.30] Australian Registered Body Number (ARBN) [9.810] Australian Performing Rights Association, [8.390] Australian Securities and Investments Commission (ASIC) disclosure documents, powers relating to [18.210]–[18.214] 906

disqualification of directors [13.290] share issues, notification of [15.100] true ownership of shares, obtaining information about [14.110] Australian Securities Exchange (ASX) Corporate Governance Principles [13.80] share issues, notification of [15.100]

B Bailees duty of care [6.680] Bailments contractual capacity where [2.530] exclusion clauses [6.740] overview [6.680] Bankruptcy directors [13.280] member, ceasing to be [14.50], [14.60] Official Trustee power of sale [4.440] trustees power of sale [4.440] Battery overview [6.100] Berne Convention, [8.1550] Board division of powers board vs general meeting [13.50] execution of contracts [12.40] meetings — see Directors’ meetings organ of company [13.20] Boycotts primary boycotts [5.190] secondary boycotts [5.230] employee organisations [5.250] international trade [5.240] lawful industrial action [5.260] substantially lessening competition [5.230] Breach of contract professional persons [6.550] time limits for action [6.30] torts, distinction [6.10], [6.30] Breach of directors’ duties account of profits [13.450] burden of proof [13.470] care, skill and diligence [13.600] civil penalties [13.470], [13.490], [13.600], [13.1270] Rich v ASIC [13.1275]

| C

Index Breach of directors’ duties — cont sentencing [13.1285] class action, [14.740] common law remedies [13.1260] compensation [13.450], [13.480] conflict of interest [13.1150], [13.1220] civil penalties [13.1270], [13.1275], [13.1285] common law remedies [13.1260] criminal liability [13.1280], [13.1285] ratification by general meeting [13.1390] consequences [13.1420] Corporations law, under [13.420] court examination of director [13.450] court orders [13.450] court relief [13.1420] criminal penalties [13.500], [13.1280] objective test [13.1283] damages common law [13.450] statutory [13.450] declaration of trust [13.450] disclosure of interests [13.1350] dishonesty or recklessness [13.500], [13.1280] disqualification [13.270] equitable remedies [13.450] evidence [13.420] exoneration from civil liability [13.1380] court, by [13.1420] internal rules, by [13.1410] ratification by general meeting [13.1390], [13.1400] fiduciary duties, summary of issues arising [13.1420] general law [13.420] remedies [13.450] good faith to act in interest of company [13.890], [13.900], [13.1080], [13.1370] indemnity [13.1410] information, misuse of [13.1210], [13.1250] case law [13.1255] injunction [13.450] insolvent trading [13.830] insurance against personal liability [13.1410] internal rules excusing [13.1410] issues arising upon breach, summary [13.1420] legal consequences [13.410], [13.500] management banning order [13.440], [13.480] member remedies — see Members’ rights and remedies misleading or deceptive conduct — see Misleading or deceptive conduct misuse of position — see Directors’ misuse of position oppression remedies [13.450] penalties [13.460] case law example [13.490] civil [13.470], [13.480] criminal [13.500] position, misuse of — see Directors’ misuse of position proper purpose criminal penalty [13.1080], [13.1280] determining [13.1020] objective test [13.1078]

proper use information, of [13.1250], [13.1280] position, of [13.1230], [13.1240], [13.1255] ratification by general meeting [13.50], [13.1390], [13.1400] remedies [13.450], [13.1260], [13.1280] rescission [13.450] sanctions [13.440] sentencing [13.280] statutory remedies [13.450] termination of employment [13.450] who may sue [13.430] winding up [13.450] Burden of proof civil law [1.740] criminal law [1.750], [6.20] duty of care [6.390] Business judgment rule defence to breach of duty [13.740] limitations [13.760] overview [13.750] protection from personal liability [13.750] reform proposals [13.330], [13.770] Business structure comparison, [9.350] corporate forms, [9.360], [9.410] incorporated associations, [9.420] joint venture, [9.330], [9.350] limited liability partnership, [9.135], [9.350] non-corporate forms, [9.20], [9.350] not-for-profit association, [9.270], [9.350] overview, [9.10] sole trader, [9.30], [9.350] trust, [9.220], [9.350] By-laws [1.430]

C Capacity agent, to act as [7.40] Capital maintenance doctrine — see Capital maintenance doctrine raising — see Fundraising reduction — see Capital reduction share — see Share capital; Shares Capital maintenance doctrine overview [16.20] reforms [16.40] Trevor v Whitworth rule [16.30] Capital reduction ability to pay creditors not materially prejudiced [16.90], [16.140] 907

Business and Corporate Law Capital reduction — cont Re CSR Ltd, [16.145] breach of Ch 2J, [16.520], [16.530] cancellation of shares [16.220] date of effect [16.190], [16.90] definition [16.60] equal reductions [16.160], [16.200] exchanging equity for debt [16.70] exempted reductions [16.220] fair and reasonable [16.90], [16.110]–[16.130] case law, [16.125] definition, [16.120] “shareholders as a whole”, [16.130] internal rule [16.70] legislation [16.210] lost [16.220] minimum requirements for [16.90] exemptions [16.220] minority member, eliminating [16.80] protection of shareholders and creditors [16.110] reasons for [16.70] regulation of [16.80] return of capital [16.70] selective reductions [16.170]–[16.200] matters to consider, [16.190] Winpar Holdings v Goldfields Kalgoorlie, [16.180] share buy-back — see Share buy-back shareholder approval [16.90], [16.150] equal reductions [16.160], [16.200] information to shareholders [16.190] notice of meeting [16.190], [16.200] selective reductions [16.170]–[16.170], [16.200] special resolution [11.250], [16.170], [16.190] summary of procedures [16.200] takeover context [16.220] unlimited companies [16.220] what constitutes [16.60] Care, skill and diligence, directors’ duty of acting collectively to manage company [13.640] authority, leading [13.580]–[13.586] business judgment rule [13.750]–[13.770] care [13.590]–[13.600] chief financial officers [13.690] civil penalties [13.1270] common law duty [13.530], [13.560] common law remedies [13.1260] contract of employment [13.520] criminal liability [13.1280] delegation [13.700]–[13.720] determining compliance [13.570] differing board functions [13.640] diligence [13.620] entrepreneurial risk-taking [13.740] equitable duty [13.530], [13.560] executive directors [13.520], [13.650]–[13.680] expected standard of conduct [13.590] general law duties [13.530], [13.560] insolvent trading, preventing — see Insolvent trading 908

issues affecting duty [13.630]–[13.740] non-executive chair of listed company [13.680] non-executive directors [13.520], [13.650]–[13.680] reasonable person test [13.590] reliance on information or advice of others [13.730] scope of duty [13.570]–[13.622] skill [13.610]–[13.618] source of duty [13.510] standard of care [13.570], [13.590], [13.650]–[13.670] summary of duties [13.842] Carbon pricing false or misleading representations [5.650] misleading or deceptive conduct [5.586] Cartel conduct arrangement or understanding [5.130] case studies [5.130] overview [5.110] prosecution of offences [5.70], [5.126] Causation negligence [6.440] “but for” test [6.440], [6.450], [6.820] civil liability legislation [6.820] limits of test [6.450] Caveat emptor [4.720] Certificate of registration [9.770], [9.780] CHESS (Clearing House Electronic Subregister System) [14.170] Chancery [1.50] Character merchandising passing off, [8.2600] case examples, [8.2610]-[8.2630] Charges — see Personal property securities Chief financial officers case law [13.470], [13.584], [13.618], [13.690] role and responsibilities [13.690] Civil law appeals [1.740] overview [1.580], [1.730], [1.740] Civil liability legislation amendments [6.770] apologies, effect [6.970] assumption of risk [6.830] background to introduction [6.770] causation [6.820] contributory negligence [6.880]

| C

Index Civil liability legislation — cont criminals [6.940] dangerous recreational activities [6.840], [6.850] duty of care [6.810] non-delegable duty [6.870] professional negligence [6.860] economic losses [6.890] good samaritans [6.950] intoxication [6.930] legal profession [6.980] limits on damages [6.890] mental harm [6.900] negligence, definition [6.800] nervous shock [6.770] New South Wales [6.770], [6.790]-[6.980] non-delegable duty [6.870] non-economic losses [6.890] organisation of Act [6.790] overview [6.770] professional negligence [6.860] proportionate liability [6.910] public authorities [6.920] self-defence [6.940] state and territory acts [6.780] volunteers [6.960] Civil pecuniary penalties Australian Consumer Law [5.820] Competition and Consumer Act [5.70] Civil penalty provisions breach case law [13.470], [13.490], [13.618] duty of care, of [13.600] penalties [13.470]–[13.490] proceedings by ASIC [13.470], [13.490] overview [13.470] share capital transactions [16.520] Civil proceedings definition [14.210] standard of proof [1.740] Class actions ASIC, by, [14.740] Competition and Consumer Act [5.10] definition, [14.210] Codes of conduct franchising, [8.2790] Commercial law overview [1.20], [1.670] Common law doctrine of precedent [1.40], [1.50], [1.360], [1.440] equity, and [1.50], [1.60] equity, distinction [1.60] historical background [1.40], [1.70] doctrine of precedent [1.40], [1.50], [2.240], [2.245]

merger with equity [1.60] overview [1.360], [1.440] statutory law, and [1.450] Common seal ACN, ARBN or ABN on [9.810] execution of contract [12.60], [12.70] statutory assumption [12.100], [12.110] secretary witnessing affixing of [13.190], [12.70] Commonwealth parliament legislative powers [1.150], [1.190], [1.420] anti-competitive trade practices [5.80] Australian Consumer Law [5.510] British laws [1.200], [1.220] concurrent powers [1.160] conflicting state laws [1.160], [1.170] consumer protection [1.420], [5.510] corporations power [1.420] delegated legislation [1.430] exclusive powers [1.175] extension of powers [1.420] extraterritorial laws [1.200], [1.220] financial powers [1.420] intellectual property, [8.20] list of provisions [1.150] residual powers [1.420] separation of powers [1.550] sovereignty of parliament [1.380] Trade Practices Act [1.420] overview [1.140] structure [1.400] Lower House (Representatives) [1.400] Upper House (Senate) [1.400] Company artificial legal entity [13.10] change of status, [9.700] classification of, [9.560], [9.690] liability of members, [9.560], [9.620] public status, [9.630], [9.650] size, [9.660], [9.690] coming into existence, [9.770], [9.850] contracts by — see Contract criminal liability — see Criminal liability division of powers [13.10]–[13.60] board of directors [13.20] board vs general meeting [13.50] general meeting [13.30] residual [13.40] single director/shareholder companies [13.60] formation [9.350] liability of [12.10] civil penalties [12.350] contract — see Contract criminal — see Criminal liability tort [12.270]–[12.290] limited by guarantee — see Company limited by guarantee memorandum of association, [10.120] 909

Business and Corporate Law Company — cont no liability [9.580], [9.610] other entities, compared [9.350] proprietary — see Proprietary company public — see Public company registration — see Registration self-incrimination [12.390] separate legal entity, as [9.850], [9.900] types of [9.360] unlimited [9.620] Company limited by guarantee ceasing to be member [14.50] change of status, [9.700] constitution, requirement to have, [10.70] “Limited”, exclusion of, [9.830] overview, [9.580], [9.600] Company limited by shares ceasing to be member [14.50] change of status, [9.700] company limited by guarantee compared, [9.600] name, [9.590], [9.630] number registered, [9.695] overview, [9.580], [9.590] Small Business Guide, [9.640] Company secretary appointment [13.190] defective [13.200] authority to enter contracts [12.220] execution of contracts [12.40] powers and duties [13.190] proprietary company, optional for [13.170], [13.190] public company [13.170], [13.190] replaceable rules [10.50] usual (implied actual) authority [12.220] validity of acts [13.200] Competition and Consumer Act — see also Australian Consumer Law administration of Act [5.20]-[5.70] civil pecuniary penalties [5.70] class actions [5.10] Commonwealth’s legislative power [5.80] competition, concept [5.100] consumer protection in digital age [5.10] enforcement [5.70] exclusion of liability [6.730] market, concept [5.90] national access regime [5.45] object of Act [5.10] overview [1.20], [5.10] remedies [5.70] structure of Act [5.10] torts, and [6.730] transfer of proceedings [5.10] unconscionable conduct [5.590] Computer programs copyright, [8.150] parallel importation, [8.550] 910

patents, [8.1850] Computer software sale of goods legislation [4.100], [4.130] Conditions overview [4.560] Confidential information conflict of interest, [13.1210] purpose, [13.1250] contracts, [8.2720] elements of action, [8.2720] employee obligations, [8.2750] post-employment, [8.2750], [8.2760] meaning, [13.1210] misuse, [13.1210], [13.1250] case law, [13.1255] nature of action, [8.2700] overview, [8.10], [8.2700], [8.2710] public interest defence, [8.2730] remedies, [8.2740] trade secrets, [8.2700] types of information, [8.2700] Confidential information, directors’ use of conflict of interest [13.1210] purpose [13.1250] misuse [13.1210], [13.1250] meaning [13.1210] Conflict of interest, directors’ duty to avoid breach of duty — see Directors’ duties, breaches of bribes [13.1180] civil penalties [13.1270] common law remedies [13.1260] competing with company [13.1220], [13.1240] confidential information — see Confidential information, directors’ use of contract with company of which director [13.1160] criminal liability [13.1280] definition [13.1130] disclosure obligations [13.1140] examples [13.1150]–[13.1220] bribes [13.1180] entering contract with company of which director [13.1150] personal profits from acting as director [13.1170] taking up corporate opportunity [13.1200]–[13.1200] undisclosed benefits [13.1180] source general law duty [13.1140] statutory duty [13.1140] voting at general meeting [13.1300] Consent defence to intentional tort [6.200]

Index Consent to contracts overview [3.10] statutory changes to common law [3.250] terminology [3.10] unconscionable conduct, by [3.240] undue influence, by — see Undue influence Consideration definition [2.320] existing duties excluded from [2.390]–[2.397] extra payment, for [2.400], [2.405] forms of [2.320] legally sufficient, to be [2.380] overview [2.320] past, not to be [2.350], [2.355] present or future, to be [2.350] simple contract, necessary to enforce [2.330] terminology [2.320] vague or illusory, not to be [2.360] value required [2.370] Constitution — see also Internal rules adoption of [11.250] alteration to displacing replaceable rules, [10.180] effective date [10.170] general law limits [10.200] general meeting, power of [13.30] limits [10.190] modifying replaceable rules, [10.180] removal of directors [13.260] special resolution [10.20], [10.30], [10.160], [11.250] statutory limits [10.190] amendments [1.570] breach, [10.250] personal rights of members, [14.380] binding on parties [10.150] branches of government [1.140], [1.550] separation of powers [1.550] breach [10.250] companies with [10.240] companies without [10.230] personal rights of members [14.380] Commonwealth legislative powers [1.150], [1.190], [1.420] anti-competitive trade practices [5.80] Australian Consumer Law [5.510] concurrent powers [1.160] conflicting state laws [1.160], [1.170] consumer protection [1.420], [5.510] corporations power [1.420], delegated legislation [1.430] exclusive powers [1.175] extension of powers [1.420] extraterritorial laws [1.200], [1.220] financial powers [1.420] list of provisions [1.150] powers over Territories [1.185] separation of powers [1.550] companies that must have [10.70] compliance with Corporations Act, evidence of, [10.35]

| C

constitutional monarcy [1.400] contractual effect [10.150], [10.250], [14.380] director’s breach of duty, excusing [13.1410] enforcement [10.250] High Court [1.140] interpretation [1.190], [1.420] historical background [1.140] injunction against breach [10.260] internal rules of company [10.20] limitation on powers clause, [10.210] breach, [10.250], [10.260] companies with, [10.240] companies without, [10.230] legislative powers, intellectual property, [8.20] memorandum and articles of pre-1998 company [10.140] overview, [10.90] listed public company [10.70] members’ rights conferred by [14.380] memorandum and articles of pre-1998 company, [10.140] modification [10.20], [10.30], [10.160], [14.290] conflicts between members, giving rise to [14.310] effective date, [10.170] expropriation of shares [14.300] fraud on the minority [14.230]–[14.380] relevant law [14.290] replaceable rules, using, [10.180] right to challenge [14.220] special resolution [10.20], [10.30], [10.160], [11.230], [14.230] objects clause [10.220] acts outside (ultra vires) [10.220] breach, [10.260] companies with, [10.240] companies without, [10.230] overview [1.140], [1.610], [10.90] personalised rules [10.10], [10.90] pre-1998 company [10.140] referendums [1.570] related party transactions — see Related party transactions separation of powers [1.550] share issue restrictions [15.200] single director/shareholder company [10.100] special resolutions making up [10.70] specialised provisions [10.90] states’ legislative powers [1.160], concurrent powers [1.160] conflicting Commonwealth laws [1.160], [1.170], consumer protection [5.510] residual powers [1.190] statutory provisions [10.30] Constitutional law overview [1.610] Consumer contracts definition [5.880] unfair terms [5.500], [5.870], [5.960] 911

Business and Corporate Law Consumer contracts — cont consumer contract, definition [5.880] enforcement of regime [5.940] exempt contracts [5.910] remedies [5.950] standard form contracts [5.890], [5.900] transparency of terms [5.930] unfair, definition [5.920] Consumer guarantees failure to comply [5.730] included guarantees [5.730] overview [5.720], [5.730] remedies [5.850] Consumer policy framework [5.490] Consumer protection Commonwealth’s legislative powers [1.420] guarantees [5.735] failure to meet [5.735] legislation [4.720], [5.10] Competition and Consumer Act, constitutional limitations [1.420] overview [4.10], [4.720], [5.10] Continuous disclosure CLERP 9 [14.110] directors’ obligations, [13.1140] global financial crisis, and, [13.110] Contract law employment contracts [1.630] overview [1.660] Contract agency principles [12.50], [12.60] authority to enter actual [12.40] apparent (ostensible) [12.40] company secretary [12.220] express [12.40] implied [12.40] individual directors [12.190] lack of [12.20], [12.90], [12.240] managing directors [12.210] sole director companies [12.200] usual (implied actual) [12.180]–[12.220] breach of inducing, liability for [2.780] termination by, [3.520]–[3.540] collateral [2.590] common seal [12.60], [12.70], [13.190] confidential information, [8.2720] constructive notice doctrine [12.260] contrary to Corporations Act [12.30] defective structures [6.560] directors’ conflict of interest [13.1160] execution by company [12.40], [12.60], [12.70] deed, as [12.180] execution clause on proxy form [12.70] statutory assumption [12.110], [12.120] 912

statutory assumption, [12.110], [12.120] with seal [12.60], [12.120] without seal [12.60], [12.120] indoor management rule [12.50], [12.240]–[12.260] constructive notice [12.260] continued role [12.250] statutory assumptions replacing [12.50], [12.240] liability of companies [12.20]–[12.270] authority [12.20], [12.40], [12.180]–[12.220] balancing of rights [12.20] defence of lack of authority [12.20] general requirements [12.30] statutory assumptions [12.90]–[12.170] summary [12.270] misrepresentation negligent [6.500] negligent misstatement [6.500] overview [12.20] partners — see Partner public policy, contrary to [12.30] requirements for enforceability [12.30] statutory assumptions authority to exercise powers [12.110] authority to warrant that document genuine [12.110] close dealings with individuals, where, [12.130] constitution complied with [12.110] dealings with company, meaning [12.100] director/secretary duty appointed [12.110] document duly executed [12.110], [12.120] entitlement to make [12.90]–[12.100] exceptions [12.130]–[12.170] holding out to be officer or agent [12.110] officers/agents, validity of, [12.110] post-1 July 1998, [12.150] pre-1 July 1998, [12.140] proper performance of duties [12.110] replaceable rules complied with [12.110] unconscionable [3.240] unfair terms [5.870], [5.960] usual (implied actual) authority company officers [12.180] company secretary [12.220] individual directors [12.190] managing directors [12.210] sole director companies [12.200] voidable [12.30], [12.240] Contractual capacity bankrupts [2.530] corporations [2.520] crown, the[2.525] incapacity, effect of [2.420] intoxicated persons [2.510] mentally incapacitated persons [2.510] minors or infants [2.430] common law position, [2.440]–[2.480] New South Wales [2.490] South Australia [2.500] torts [2.480] valid contracts [2.450], [2.540]

Index Contractual capacity — cont void contracts [2.470], [2.540] voidable contracts [2.460], [2.540] overview [2.420] persons who may lack [2.420] terminology [2.420] Contributory negligence adjustment of damages [6.710] civil liability legislation [6.880] overview [6.710] Controller — see Receivership Conversion copyright infringement, [8.1220], [8.1230] overview [6.170] Copyright Acts of Parliament, [8.700] Anton Piller orders, [8.1250] artistic works, [8.180] commissioned works, [8.300] definition, [8.180] drawings, [8.180] duration of copyright, [8.730] exceptions to infringement, [8.690] exclusive rights, [8.310] novelty, [8.1890] published editions, [8.980] resale royalty rights, [8.1540] three-dimensional reproduction, [8.350] work of artistic craftsmanship, [8.190], [8.200] assignment, [8.1030], [8.1040] Australian Performing Rights Association, [8.390] future copyright, [8.1090] authorising infringement, [8.430] case example, [8.440] connection requirement, [8.450] matters taken into account, [8.450] authors, [8.240] exceptions, [8.250] moral rights, [8.1420]-[8.1530] resale royalty rights, [8.1540] carriage service providers, [8.1260] categories, [8.30], [8.40] cinematograph films, [8.750], [8.830] computer games, [8.840] duration of copyright, [8.890] exclusive rights, [8.860] ownership of copyright, [8.870] subsistence of copyright, [8.850] compilations, [8.100] telephone directories, [8.110], [8.140] television program schedules, [8.120], [8.130] computer programs, [8.150] parallel importation, [8.550] Conventions, Berne and UCC, [8.1550] criminal offences, [8.1330] performers’ rights, [8.1400]

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damages, [8.1120], [8.1130] additional damages, [8.1180]-[8.1210] conversion or detention, [8.1220], [8.1230] defences, [8.590] fair dealing, [8.600]-[8.640], [8.1010] innocent infringement, [8.1140], [8.1150], [8.1230] designs, and, [8.1710], [8.1770] applied industrially, meaning, [8.1750] corresponding design, meaning, [8.1730] exceptions, [8.1760] registered corresponding designs, [8.1720], [8.1730] standards, [8.1600] unregistered corresponding designs, [8.1740], [8.1750] dramatic works, [8.160] duration of copyright, [8.720] published editions, [8.980] duration of copyright, [8.720] artistic works, [8.730] cinematographic films, [8.890] joint authorship, [8.740] sound recordings, [8.820] television and sound broadcasts, [8.970] educational copying, [8.670] broadcast programs, [8.660] photocopying, [8.670] employees, [8.260] exclusive rights, [8.310] adaptations, [8.410] cinematograph films, [8.860] commercial rental, [8.420] communication to the public, [8.400] publication, [8.360] public performance, [8.370], [8.380] reproduction in a material form, [8.320]-[8.350] sound recordings, [8.780] television and sound broadcasts, [8.920]-[8.940] exemptions from infringement, [8.2115] fair dealing, [8.600], [8.610] audio-visual items, [8.1010] case examples, [8.610], [8.630], [8.640] meaning, [8.600], [8.620] research or study, [8.650] format-shifting, [8.680] sound recordings, [8.810] franchise agreement, disclosure, [8.2790] Franchising Code of Conduct, [8.2790] future copyright, [8.1090] ideas, and, [8.210], [8.220] formulated expression, distinction, [8.230] importing infringing articles, [8.460], [8.470] knowledge of importer, [8.470], [8.480] parallel importation, [8.490]-[8.560], [8.1000] published editions, [8.990] incorporeal right, [8.40] independent contractors, [8.260] journalists, [8.290] infringement, [8.430] authorising infringement, [8.430]-[8.450] 913

Business and Corporate Law Copyright — cont carriage service providers, [8.1260] damages, [8.1210] importing infringing articles, [8.460], [8.470]-[8.560] online piracy, [8.1265] peer-to-peer file sharing, [17.590], [17.600], [17.610] remedy, [8.1160] sale of infringing articles, [8.460], [8.570], [8.580], [8.2400] secondary infringements, [8.460] statutory defences, [8.590]-[8.640], [8.1010] statutory exceptions, [8.650]-[8.700], [8.810], [8.960], [8.1020] international protection, [8.1550] TRIPS agreement, [8.1560] internet service providers, [8.1260] journalists, [8.270], [8.280] newspaper proprietors, [8.260], [8.290] judgments or orders, [8.700] judicial proceedings, acts for, [8.1020] legislation, [8.20] licences, [8.1050] exclusive licences, [8.1060] implied licences, [8.1070], [8.1080] musical works, [8.710] sound recordings, [8.800] literary works, [8.90] compilations, [8.100]-[8.140] computer programs, [8.150] definition, [8.90], [8.100], [8.150] duration of copyright, [8.720] published editions, [8.980] musical works, [8.170] Australian Performing Rights Association, [8.390] duration of copyright, [8.720] licences for manufacture, [8.710] public performance, [8.370], [8.380] published editions, [8.980] nature of copyright, [8.30], [8.40] overview, [8.10], [8.30] ownership, [8.240] author, meaning, [8.240] cinematographic films, [8.870] commissioned artistic works, [8.300] employees, [8.260] independent contractors, [8.260], [8.290] journalists, [8.270]-[8.290] sound recordings, [8.790] statutory exceptions, [8.250]-[8.300] television and sound broadcasts, [8.950] parallel importation, [8.490], [8.500] books, [8.520] computer software, [8.550] electronic items, [8.560] labelling or packaging, [8.530], [8.540] relaxation of restrictions, [8.510]-[8.560] sound recordings, [8.1000] Patents Act 1990, [8.1780] biological processes, [8.1840] computer programs, [8.1850] 914

extensions, [8.2040] performers’ protection, [8.1340] consent to use, [8.1380] duration of protection, [8.1390] extension of rights, [8.1410] moral rights, [8.1410] offences, [8.1400] performance, meaning, [8.1350] remedies, [8.1370] unauthorised use, [8.1360], [8.1370] public performance, [8.370] Australian Performing Rights Association, [8.390] case example, [8.380] published editions, [8.750], [8.980] infringing copies, [8.990] remedies for infringement, [8.1100] access to encoded broadcasts, [8.1320] account of profits, [8.1140], [8.1150], [8.1160], [8.1170] anti-circumvention provisions, [8.1290] conversion or detention, [8.1220], [8.1230] damages, [8.1120], [8.1130], [8.1180]-[8.1210], [8.1220] delivery up, [8.1240] electronic rights management information, [8.1310] injunctions, [8.1110] interlocutory injunctions, [8.2120] moral rights, [8.1510], [8.1520] performers’ rights, [8.1370] reproduction in a material form, [8.320] digitised form, [8.340] films, [8.330] sound recordings, [8.330] substantial reproduction, [8.320] three-dimensional form, [8.350] resale royalty rights, [8.1540] research or study, [8.650] sale of infringing articles, [8.460], [8.570] proof of knowledge, [8.580] published editions, [8.990] sound recordings, [8.750], [8.760] duration of copyright, [8.820] exclusive rights, [8.780] format-shifting, [8.810] licences, [8.800] ownership of copyright, [8.790] parallel importation, [8.1000] reproduction in material form, [8.330] subsistence of copyright, [8.770] subject matter, [8.40] subject matter other than works, [8.40], [8.750] categories, [8.750] technological protection measures, [8.1270] access to encoded broadcasts, [8.1320] anti-circumvention provisions, [8.1270]-[8.1290] civil remedies, [8.1290], [8.1310] electronic rights management information, [8.1300], [8.1310] exceptions, [8.1280]

Index Copyright — cont television and sound broadcasts, [8.750], [8.900] duration of copyright, [8.970] exception to infringement, [8.960] exclusive rights, [8.920]-[8.940] ownership of copyright, [8.950] subsistence of copyright, [8.910] time-shifting, [8.960] trade mark, case, [8.2245] registration opposed, [8.2345] remedy, [8.2455] works, [8.40], [8.50] artistic works, [8.180]-[8.200] author, [8.240] dramatic works, [8.160] literary works, [8.90]-[8.200] musical works, [8.170] original work, meaning, [8.80] published works, [8.70] unpublished, [8.60] Corporate collapse [13.330], [13.490], [13.1280], [14.740], [15.30] Corporate governance ASX Principles [13.80] auditor independence — see Auditors CAMAC discussion paper [13.80] CLERP 9 [13.80] Combined Code (UK) [13.80] compliance systems [13.80] continuous disclosure — see Continuous disclosure debate over, [13.80] definition [13.70] disclosure requirements [13.90], [13.120] Financial Services and Credit Reform Green Paper [13.120] global financial crisis [13.110] issues [13.80] recent, [13.110] margin loans, disclosure of [13.120] overview [13.70] public companies, [13.130] reforms, [13.80], [13.100] auditor independence, [13.90] global financial crisis, following, [13.110] margin lending, and, [13.120] public companies, [13.130] 2007 recommendations, [13.100] statutory regulation vs self-regulation [13.80] Corporate group CASAC Report [9.1020] consolidated financial statements [9.970] “control” test [9.960], [9.1020] corporate veil issues [9.970] cross-directorships [9.960] cross-shareholdings [9.960] directors’ duty of good faith [13.950] individual companies as separate entities [9.960]

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exceptions [9.970] insolvent trading [9.970] Patrick Stevedores case [9.980], [9.1010] pooling arrangements [9.960], [9.1020] relationship between companies [9.970] restructuring [9.990], [9.140] separate legal entity doctrine [9.960], [9.1020] Corporate Law Economic Reform Program (CLERP) CLERP 9 [13.80], [13.90], [13.210], [13.330], [13.440], [13.640], [15.70] Corporate liability, civil penalties, [12.380] contract — see Contract crime — see Criminal liability self-incrimination [12.390] tort [12.280]–[12.300] organic theory, [12.290] vicarious liability, [12.300] war crimes [12.400] Corporate veil corporate groups [9.970] lifting [9.920], [9.950] cases [9.950] general law [9.940] statute [9.930] overview [9.900], [9.910] phoenix companies [9.910] Corporation sole [9.380] Corporations company as type of, [9.360] Constitution [1.420] contractual capacity [2.520] corporation sole [9.380] principal, as agent’s authority where [7.110] registration, formed by [9.400] Royal Charter, formed by [9.370] statutory [9.390] types [9.360], [9.410] Corporations and Markets Advisory Committee (CAMAC) Corporate Groups report [9.1020] directors’ duties, recommendations to extend [13.80], [13.650] voluntary administration report [19.190] Country of origin Australian Consumer Law [5.840] Court contractual terms implied by [2.630] Court system New South Wales historical background [1.100], [1.110] 915

Business and Corporate Law Court system — cont supreme court [1.100], [1.110], [1.370] states and territories New South Wales [1.100], [1.110], [1.370] Courts — see also Jurisdiction equity [1.50], [1.60], [1.370] historical background [1.40], [1.50], [1.60] Covenants anti-competitive effect [5.200] price-fixing [5.210] Credit or debit cards unsolicited supplies [5.680] Creditor definition [19.10] directors’ duty of good faith to [13.870], [13.940] liquidators’ duty to [19.230] meetings [19.50] schemes of arrangement [19.420] secured, definition [19.10] voluntary winding up [19.140] Crimes overview [6.20] torts, distinction [6.10], [6.20] Criminal law burden of proof [1.750], [6.20] overview [1.580], [1.620], [1.730], [1.750] standard of proof [6.20] Criminal liability Australian Consumer Law [5.800] case law [12.330]–[12.350] companies [12.310]–[12.370] corporate culture [12.370] Criminal Code Act [12.370] criminal penalties [12.380] directing mind and will of company [12.320] mens rea [12.310] negligence element [12.370] offences punishable by imprisonment [12.370] organic theory [12.320] overview [12.310] physical element of offence [12.370] self-incrimination [12.390] statutory attribution [12.350] vicarious [12.360] war crimes [12.400] director’s breach of duty — see Directors’ duties, breaches of Criminal offences cartel conduct [5.70], [5.110] copyright infringement, [8.1330] performers’ rights, [8.1400] 916

Cross-border insolvency [19.200] Cross-vesting of jurisdiction Competition and Consumer Act [5.10] Crowd-sourced funding offers disclosure regime, proposed, [18.30], [18.330] Curia Regis [1.40]

D Damages Australian Consumer Law [5.830] common law [1.50] contributory negligence [6.710] copyright infringement, [8.1120], [8.1130] additional damages, [8.1180]-[8.1210] conversion or detention, [8.1220], [8.1230] design infringement, [8.1670] motor vehicle accidents [6.750] negligence [6.460] contributory negligence [6.710] motor vehicle accidents [6.750] proportionate liability [6.910] pure economic loss [6.490] statutory limits [6.890] patent infringement, [8.2120] pure economic loss [6.490] restrictive trade practices, [19.610] Death survival of action [6.70] Debenture borrowers’ duties [17.110] chose in action [17.50] conversion to shares [17.90] definition [17.50], [17.70] disclosure documents exemption [18.110] distinctions [17.70], [17.80] guarantors’ duties [17.110] mortgage [17.70], [17.80] public offerings [17.60] register of debenture holders [17.60] secured loan [17.70] stock [17.60] subordinating debt [17.230] trust deed [17.100] duties of borrowers and guarantors [17.110] unsecured note [17.70], [17.80] Debt debt/equity distinction [17.30], [17.40] debt to equity ratio [15.10] definition [15.10] gearing [15.10] loan capital — see Loan capital subordinating [17.230]

Index Deed of company arrangement [19.100] Defective products manufacturer’s liability [5.790], [6.640], [6.730] exclusion clauses [6.740] negligence [6.640] Defective structures breach of contract [6.560] duty of care [6.560] negligence [6.560] residential tenancies [6.560] Defences Australian Consumer Law [5.800] confidential information, [8.2730] copyright, [8.590] fair dealing, [8.600]-[8.640], [8.1010] innocent infringer, [8.1140], [8.1150] moral rights, [8.1490] designs, [8.1690] moral rights, [8.1490] negligence [6.690] contributory negligence [6.710] illegal enterprise [6.720] professional negligence [6.860] voluntary assumption of risk [6.700] torts [6.190] consent [6.200] defence of others [6.210] necessity [6.230] self-defence [6.210] statutory authority [6.240] unavoidable accident [6.220] trade marks, [8.2410] similar goods, [8.2410], [8.2420] statutory defences, [8.2410] importers, and [8.2425] unregistered marks, [8.2430] Definitions artistic work, [8.180] cinematograph film, [8.830] computer program, [8.150] consumer [5.560] consumer contract [5.880] consumer sale [4.700] contract for sale of goods [4.40] copyright, [8.30] design, [8.1580] dramatic work, [8.160] drawing, [8.180] dual listed company arrangements [5.180] goods [4.90] literary work, [8.90], [8.100], [8.150] merchantable quality [4.640], [4.680] negligence [6.60], [6.800] prior art base, [8.1880] security interest [4.545] sound broadcast, [8.900] sound recording, [8.760] television broadcast, [8.900]

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trade mark, [8.2190], [8.2370] unfair [5.920] Delegated legislation examples [1.430] overview [1.430] Delegation by director authority to delegate [13.720] internal rules, permitted by [13.710] reasons for [13.700] responsibility for actions of delegate [13.720] statute, permitted by [13.720], [13.1120] Deregistration ceasing to be member [14.50], [14.60] winding up [19.40] Derivative action application for leave [14.430] “best interests of the company”, [14.435] case law, [14.430] liquidation, effect of, [14.445] rebuttable presumption, [14.440] company’s name, brought in [14.410] costs [14.450] definition [14.210] directors or officers [14.420] leave of court [14.430] “best interests of the company”, [14.435] case law, [14.430] liquidation, effect of, [14.445] rebuttable presumption, [14.440] members’ statutory remedy [14.200], [14.210], [14.410] personal action, definition [14.210] ratification, effect [14.440] reasons for bringing [14.460]–[14.470] Charlton v Baber, [14.470] third parties [14.420] who can bring [14.420] winding up, company in process of [14.420] wrong done to company [14.410] Designs copyright, and, [8.1710], [8.1770] applied industrially, meaning, [8.1750] corresponding design, meaning, [8.1730] exceptions, [8.1760] registered corresponding designs, [8.1720], [8.1730] unregistered corresponding designs, [8.1740], [8.1750] damages, [8.1670] definition, [8.1580] duration of registration, [8.1680] exclusive rights, [8.1640] infringement, [8.1650] proceedings, [8.1650] remedies, [8.1670] substantially similar impression, [8.1660] legislation, [8.1570] 917

Business and Corporate Law Designs — cont new and distinctive designs, [8.1600] determining, [8.1600] overview, [8.10], [8.1570] ownership of design, [8.1610] exclusive rights, [8.1640] priority date, [8.1630] publication of design, [8.1700] registrable designs, [8.1600] registration, [8.1570], [8.1590] duration of registration, [8.1680] procedure, [8.1620] publication alternative, [8.1700] remedies, [8.1670] spare parts, [8.1690] right of repair defence, [8.1690] Detinue copyright infringement, [8.1220], [8.1230] delivery up, [8.1240] overview [6.180] Director access to information [13.300] alternate [13.150], [13.170] meetings, attending [11.20] appointment [13.160] AGM, at [11.80] alternate director [11.20], [13.170] casual vacancy, filling [13.170] consent, [13.180] constitution, restrictions in [13.180] defective [12.220], [13.200] existing directors, by [13.170] general meeting, by [13.30], [13.170] initial members [13.170] minimum number [13.160] one-person company [13.60] overview [13.160] restrictions [13.180] who can appoint [13.170] bankrupt [13.280] conviction of offence [13.280] prior, appointment and, [13.180] de facto, [13.140] definition [13.140] delegation of functions — see Delegation by director directing mind and will of company [12.290] disqualification from office ASIC, by [13.290] bankruptcy [13.280] breach of duties, for [13.280] conviction of offence [13.280] court, by [13.280] offence to participate in management after [13.270] overview [13.270] duties — see Directors’ duties breach of — see Breach of directors’ duties execution of contracts, [12.40] effectiveness of acts [13.200] 918

executive [13.150], [13.650] remuneration [13.210] standard of care [13.650], [13.680] fiduciary relationship with company [13.210], [13.340] fraud [13.320] insolvent [13.170] liability for corporate fault [13.305] management banning order [13.440], [13.480] managing [13.150] appointment [13.170] meetings — see Directors’ meeting meetings, attending alternate [11.20] minimum number [13.170] mismanagement [13.320] nominee[13.150] duty of good faith [13.960] non-executive [13.150], [13.650] remuneration [13.210] rival companies, of [13.1220] standard of care [13.650], [13.680] personal liability for corporate fault [13.305] powers [13.20] single director/shareholder company [13.60] proprietary company minimum number [13.160] public company minimum number [13.160] removal [13.240] remuneration disclosure [13.220] related party transactions — see Related party transactions removal of alteration of constitution [13.260] general meeting, by [13.30], [13.240] proprietary company [13.240] public company [13.250] remuneration [13.210], [13.220] AGM, consideration at, [11.80], [11.85] disclosure requirements [13.230] global financial crisis, reforms post[13.220] recent developments [11.85], [13.220] replaceable rules [10.50], [13.160] resignation, [13.160] resolutions [11.30], [11.40], [15.30], [15.50] restrictions on appointments [13.170], [13.180] shadow, [13.140] validity of acts [13.200] who can appoint [13.170] Director of Public Prosecutions Competition and Consumer Act [5.70] Directors’ duties Aboriginal and Torres Strait Islander corporations, [13.310], [13.852], [13.1132] case law, [13.312], [13.852], [13.1132] application to other officers [13.380] business judgment rule [13.750]–[13.770] CAMAC recommendations to extend [13.390], [13.770]

Index Directors’ duties — cont categories [13.310] civil penalty provisions [13.470]–[13.490], [13.1270] common law remedies [13.1260] company as a whole, owed to [13.400] corporate collapses, effect [13.330] criminal liability [13.1280] debate [13.330] delegation [13.700]–[13.720] extension to other persons [13.80], [13.390] fiduciary [13.210], [13.340] fraud, protection against [13.320], [13.320] information, use of [13.1210], [13.1250] case law, [13.1255] mismanagement, protection against [13.320] officers, application to [13.380] outline of duties [13.350], [13.360], [13.860] overview [13.320]–[13.360], [13.860] proper use information, of [13.1250] position, of [13.1230]–[13.1240] protection of shareholders [13.320] reason for [13.320], [13.340] related party transactions [13.1370]–[13.1370] shares, allotment of, [13.1060] best interests of company, acting in, [13.1075] Howard Smith v Ampol Petroleum, [13.1070] invalid, [13.1070] Kokotovich Constructions v Wallington, [13.510] secretary, applicable to [14.190] source [13.370] statutory regulation vs self-regulation [13.330] who must perform [13.380] Directors’ duties, breaches of account of profits [13.450] burden of proof [13.470] care, skill and diligence [13.600] civil penalties [13.470]–[13.490], [13.600], [13.1270] common law remedies [13.1260] compensation [13.450], [13.480] conflict of interest [13.1150]–[13.1220] civil penalties [13.1270] common law remedies [13.1260] criminal liability [13.1280] ratification by general meeting [13.1390] consequences [13.1420] court examination of director [13.450] court orders [13.450] court relief [13.1420] criminal penalties [13.500], [13.1060], [13.1280] damages common law [13.450] statutory [13.450] declaration of trust [13.450] disclosure of interests [13.1350] dishonesty or recklessness [13.500], [13.1060], [13.1280] disqualification [13.260] equitable remedies [13.450]

| D

evidence [13.420] exoneration from civil liability court, by [13.1420] internal rules, by [13.1410] ratification by general meeting [13.1390]–[13.1400] fiduciary duties, summary of issues arising [13.1420] general law remedies [13.450] good faith to act in interest of company [13.890], [13.900], [13.1080], [13.1280] indemnity [13.1410] information, misuse of [13.1210], [13.1250] injunction [13.450] insolvent trading [13.830] insurance against personal liability [13.1410] internal rules excusing [13.1410] issues arising upon breach, summary [13.1420] legal consequences [13.410]–[13.500] management banning order [13.480] oppression remedies [13.450] particular duty breached [13.420] penalties [13.460]–[13.480] person taking action [13.430] proper purpose criminal penalty [13.1080], [13.1280] determining [13.1020] proper use information, of [13.1250]–[13.1280] position, of [13.1230]–[13.1240] ratification by general meeting [13.1390]–[13.1400], [14.50] remedies [13.450]–[13.450], [13.1260]–[13.1280] rescission [13.450] sanctions [13.440] statutory remedies [13.450], [13.450] termination of employment [13.450] winding up [13.450] Directors’ meetings alternate directors [11.20] board meetings [11.20] calling [11.30] chair, electing [11.30] concurrence in action taken [11.20] informal [11.20] notice [11.20], [11.30] overview [11.10], [11.50] quorum [11.30] replaceable rules [10.50], [11.30] report on [11.20] requirements [11.20] resolutions [11.30] single director companies [11.40] without meeting [11.30] technology, use of [11.20] Directors’ misuse of position AGM, consideration at [11.80] board meetings, details of [11.20] breach of duty [13.1230] case examples [13.1240], [13.1255] civil penalties [13.1270], [13.1285] 919

Business and Corporate Law Directors’ misuse of position — cont common law remedies [13.1260] criminal liability [13.1280] objective test, [13.1283] ″gaining of an advantage″ [13.1240], [13.1255] public companies [11.20] Directors’ report AGM, consideration at [11.80] board meetings, details of [11.20] public companies [11.20] Disclosing entities continuous disclosure [9.350], [13.90] CLERP 9 [13.90] fundraising [18.10] Disclosure — see also Disclosure documents directors’ obligations [13.1140] directors’ remuneration [13.230] fundraising [18.10] incorporated associations [9.350] margin loans [13.120] partnership requirements [9.350] share issues [15.70] short-selling [13.130] trusts [9.350] unincorporated associations [9.350] Disclosure documents — see also Prospectus advertisements [18.70] application form attached [15.80], [18.120] ASIC’s powers [18.210] Pluton Resources investigation [18.210] crowd-sourced funding offers [18.30], [18.330] exemptions [18.100], [18.110] form [18.120] fundraising disclosure [15.70], [18.10] liability where defective [18.220] civil liability [18.240] criminal liability [18.230] defences [18.250], [18.280] listed securities, offer of [18.130] lodgment [18.170] misleading or deceptive statement civil liability [18.240] criminal liability [18.220] defences [18.250], [18.280] forecasts [18.240] materially adverse [18.220] misrepresentation [18.290] fraudulent, damages for [18.310] negligent, damages for [18.320] remedies under general law [18.290], [18.320] rescission [18.300] modification of provisions by ASIC [18.210] offer information statement [18.60], [18.90], [18.140] content [18.140] lack of knowledge defence [18.270] securities quoted on ASX, not acceptable for [18.140] 920

offer of securities for sale [18.100] offers requiring disclosure [18.100] omissions [18.240] omissions [18.220] profile statement [18.70], [18.150] approval for use [18.70], [18.150] content [18.150] lack of knowledge defence [18.270] unlisted registered schemes [18.70], [18.150] prospectus — see Prospectus public companies [18.20] purpose [15.70], [18.30] replacement [18.180] securities covered [18.100] supplementary [18.180] types of [18.40], [18.70] when required [18.100] Disclosure of interests board meeting, at [13.1330] breach as criminal offence [13.1350] company proprietary [13.1320], [13.1330] public [13.1330], [13.1360] single director [13.1330] directors’ remuneration [13.230] extent of [13.1340] general law duty [13.1300] internal rules modifying duty [13.1320] manner of [13.1330] material personal interest [13.1310] replaceable rule [13.1320] standing notice [13.1330] statutory duty [13.1310] summary of regime [13.1330] Dividend financial assistance to purchase shares, [16.450], [16.470] oppression failure to pay, [14.560] failure to renew policy, [14.560] right to receive, [15.20] Doctrine of precedent common law [1.40], [1.50], [1.360], [1.440] equity [1.370], [1.440] historical background [1.40], [1.50] overview [1.440] Duomatic principle, [11.340] Duress contracts procured by [3.170] effect of [3.180] economic [3.170] Duty of care abnormal persons [6.380] bailees [6.680] burden of proof [6.390]

Index Duty of care — cont civil liability legislation [6.810] non-delegable duty [6.870] professional persons [6.860] defective structures [6.560] existence of duty [6.250], [6.280], [6.290] proximity [6.300], [6.330] reasonable forseeability [6.300] tests to determine [6.300] forseeability of harm [6.260], [6.410] negligent misstatement [6.500], [6.530], [6.540] auditors [6.540] nervous shock [6.370] new or original areas [6.270], [6.280], [6.300], [6.350], [6.360] non-delegable duty [6.650] civil liability legislation [6.870] dangerous activities [6.650], [6.660] employment situations [6.670] occupiers’ liability [6.580] case studies [6.590], [6.600] limits on liability [6.610] overview [6.250], [6.270], [6.570] parents [6.620] professional persons [6.550], [6.860] proximity [6.270], [6.300] applicability [6.350] assumption of responsibility [6.350] causal proximity [6.330] circumstantial proximity [6.320] negligent misstatement [6.540] nervous shock [6.370] new or original areas [6.300], [6.350] occupiers’ liability [6.580], [6.590], [6.600] physical proximity [6.310] public authorities [6.630] reasonable foreseeability [6.270], [6.300] nervous shock [6.370] occupiers’ liability [6.580], [6.590], [6.600] recognised relationships [6.360] reliance [6.300] standard of care [6.400] forseeability of harm [6.410] inexperience or lack of knowledge [6.430] magnitude of harm [6.420] reasonable person standard [6.400], [6.430]

E Electronic commerce overview [2.210] Employee directors’ duty of good faith to [13.870], [13.970], [13.975] case law [13.975] confidential information, [8.2750] post-employment, [8.2750], [8.2760] copyright ownership, [8.260] directors’ duty of good faith to [13.870], [13.970]–[13.980]

| E

entitlements — see Employee entitlements inventions, [8.2150] university academics, [8.2150], [8.2160] patents, [8.2150], [8.2160] share scheme buy-backs [16.370] winding up effect on [19.410] entitlements on [19.330] notice of dismissal [19.410] Employee entitlements General Employee Entitlements and Redundancy Scheme (GEERS), [9.1000] lifting corporate veil, [9.920] Patrick Stevedores case, [9.980], [9.1010], [19.135] voluntary administration, [9.980], [9.1010] winding up [19.135] Employers vicarious liability [6.620] Employment copyright ownership, [8.260] negligence [6.670] non-delegable duty [6.670] vicarious liability [6.620] Employment contracts overview [1.630] Environmental protection lifting corporate veil, [9.920] vicarious liability, [12.360] Equity assignments in [2.820] capital [17.30], [17.40] common law, distinction [1.60] courts [1.50], [1.60], [1.370] supreme court [1.110] debt/equity distinction [15.10], [17.30], [17.40] definition, [15.10] doctrine of precedent [1.370], [1.440] historical background [1.50], [1.70] Chancery Courts [1.50] common law, and [1.50], [1.60] merger with common law [1.60] New South Wales [1.60], [1.110] remedies [1.50] overview [1.370], [1.440] remedies [1.50] statutory law, and [1.450] Ending a contract attempted performance, by [3.450] breach, by [3.520] fulfilling terms, in [3.540] repudiation [3.530] consequences [3.580] contingent conditions [3.510]–[3.512] formalities not required [3.590] 921

Business and Corporate Law Ending a contract — cont frustration, by [3.550]–[3.556] legislation, by operation of [3.560] merger, by [3.570] overview [3.390] payment, by [3.410] appropriation [3.440] cheque, by [3.420] post, by [3.430] performance, by [3.400] attempted [3.450] subsequent agreement, by [3.460] accord and satisfaction [3.500] mutual discharge [3.470] release [3.480] substituted agreement [3.490] terminology [3.390] Estoppel court orders where [2.410], [2.415] doctrine [2.410], [2.415] promissory [2.410], [2.415] requirements [2.410], [2.415] sale of goods [4.340], [4.350] Exclusion or limitation clauses bailments [6.740] contracts, in [2.660] interpretation of [2.700] misrepresentation of nature [2.690] signed contracts, in [2.670], [2.675] statutory provision, limited or abrogated by [2.710] unsigned contracts, in [2.680] defective products [6.740] implied conditions or warranties [4.700] consumer sales [4.700] negligence [6.740] overview [6.740] Exclusive dealing notification of conduct [5.470] overview [5.340] parallel importing [5.320] refusal to deal [5.350] third line forcing [5.360], [5.470] case studies [5.370]-[5.390] Executive separation of powers [1.550] External administration, Aboriginal and Torres Strait Islander corporations [19.10] creditor, definition [19.10] inter-relationship between forms [19.290], [19.300] overview [19.10] receivership — see Receivership schemes of arrangement [19.420], [19.430] secured creditor, definition [19.10] types of [19.10] 922

voluntary administration — see Voluntary administration winding up — see Winding up External relations [1.180] Extraterritorial laws Commonwealth Parliament [1.200], [1.220] overview [1.200]

F False imprisonment overview [6.110] False or misleading representations ASX, made to, [13.435] Australian Consumer Law [5.620] case studies [5.630], [5.640] pre-introduction [5.660] carbon price [5.650] disclosure documents [18.240] civil liability [18.240] criminal liability [18.220] defences [18.250], [18.280] materially adverse [18.220] franchising, [8.2800] overview [6.730] replacement or supplementary PDS, [18.180] supply of good or services [5.620] Federal Court of Australia Competition and Consumer Act [5.10], [5.50] Financial records requirement to keep [9.430] AGM, consideration at, [11.80], [11.85] Financial assistance to purchase assisting company’s shares breach of Ch 2J [16.520], [16.530] definition, [16.470] dividend [16.450], [16.460] exemptions [16.500] financial assistance, meaning [16.500] general restriction [16.450] lifting corporate veil [9.920] material prejudice [16.480] protection of creditors and shareholders [16.460] shareholder approval [16.490] Financial records corporate groups, consolidated statements [9.970] financial statements corporate groups, consolidated statements [9.970] incorporated associations [9.470]

| G

Index disclosure documents — see Disclosure documents private methods [18.10] prospectus — see Prospectus public offers [18.10] securities hawking [18.200]

Financial reports AGM, consideration at [11.80] Financial services margin loans, disclosure of [13.120] Financial Services and Credit Reform Green Paper [13.120] Formation of company incorporation [9.750] pre-registration contracts — see Pre-registration contract promoters — see Promoter registration — see Registration shelf company [9.760] Foss v Harbottle, rule in [14.390] Franchising advantages, [8.2770] code of conduct, [8.2790] false or misleading representations, [8.2800] franchise agreement, [8.2780] intellectual property, and, [8.2770] misleading or deceptive conduct, [8.2800] overview, [8.10], [8.2770] types of arrangements, [8.2770] unconscionable conduct, [8.2800] Fraud class action, [14.740] directors, by [13.320] winding up, [14.810] Fraud on the minority definition [14.230] doctrine of [14.230] examples [14.250] expropriation of company’s property [14.270] members’ property [14.280] shares [14.280], [14.300] majority members not fiduciaries [14.240] modification of internal rules conflicts between members, giving rise to [14.310] expropriation of shares [14.300] relevant law [14.290] right to challenge [14.220] ratification of directors’ breach of duty improper [14.260] not available [13.1390] right to challenge [14.220] Fundraising Aboriginal and Torres Strait Islander corporations [18.12] advertisements [18.190] ASIC’s powers [18.2190]

G General meeting — see also Annual general meeting (AGM); Members’ meeting calling [11.120] case law, [11.170] court [11.160] directors at request of members [11.140] directors’ failure to call [11.140] members [11.150] contracts execution [12.40] directors calling [11.140] directors election/removal of [13.30] voting at [13.1300] express powers [13.30] extraordinary [11.100] matters considered at [11.110] members’ control [11.150], [14.200] notice [11.210] contents [11.230] manner of giving [11.220] objection to decision of board [13.50] organ of company [13.30] proper purpose [11.130] ratifying breach of duty by directors [13.50], [13.1390]–[13.1400] reasonable time and place [11.120]–[11.130] replaceable rules, [10.50] residual powers [13.40], [13.50] voting right [11.290], [14.200], [14.220] proxies and body corporates [11.300] who can call [11.120] Gifts unfair practices [5.670] Global financial crisis (GFC) corporate reforms, and, [13.110] directors’ remuneration reforms, and [11.85], [13.220] Productivity Commission report, [11.85] Good faith in the interests of company, directors’ duty to act in civil penalties [13.1270] classes of shares [13.930] common law remedies [13.1260] corporate groups [13.950] creditors’ interests [13.870], [13.940] criminal liability [13.1280] description [13.880], [13.1060] employees’ interests [13.870], [13.970]–[13.980] 923

Business and Corporate Law Good faith in the interests of company, directors’ duty to act in — cont fiduciary relationship [13.340], [13.860] internal rules, impact of [13.980] members’ interests [13.870], [13.920] nominee directors [13.960] persons to whom duty owed [13.870] proper purpose, and [13.1080] public interest [13.970]–[13.980] scope [13.910]–[13.980] classes of shares [13.930] corporate groups [13.940] creditors [13.940] employees [13.970]–[13.980] members [13.920] nominee directors [13.960] public interest [13.970] wholly owned subsidiaries, directors [13.950] shares, allotment of [13.1060] best interests of company, acting in [13.1075] Howard Smith v Ampol Petroleum [13.1070] invalid [13.1070] Kokotovich Constructions v Wallington [13.1075] statutory duty [13.890], [13.1080] wholly owned subsidiaries [13.950]

H High Court constitutional interpretation [1.190], [1.420] establishment [1.140] overview [1.140] HIH Royal Commission report [13.90], [13.330], [13.640]

I Illegal enterprise negligence, and [6.720] Implied conditions and warranties — see also Consumer guarantees common law, and [4.720] correspondence with description [4.600] correspondence with sample [4.690] exclusion or limitation [4.700] consumer sales [4.700] fitness for purpose [4.610], [4.680] case studies [4.620], [4.650], [4.670] merchantable quality, and [4.680] seller’s skill and judgment [4.620], [4.630], [4.670] merchantable quality [4.620], [4.640] definition [4.640] expectation of buyer [4.660], [4.670] 924

fitness for purpose, and [4.680] hidden defects [4.640], [4.650] sale by description [4.640] professional advice [6.540] sale of goods legislation [4.140], [4.560], [4.570] title of goods [4.580], [4.590] Incorporated association audit, [9.470], [9.477] cancellation of incorporation, [9.540] distribution of surplus assets, [9.550] reasons for, [9.530] certificate of incorporation, [9.440] committee members, [9.450] common seal, [9.450] consequences of incorporation, [9.440] constitution, [9.450] limiting powers, [10.210] continuing regulatory requirements, [9.470] eligibility, [9.435] ending, [9.520], [9.550] financial records and returns, [9.470] incorporation procedure, [9.430] internal rules, [9.450] lawful, not-for-profit purpose, [9.435] members dwindling membership, where, [9.520] liability of, [9.420], [9.450] minimum number of, [9.435] rights of, [9.510] name, [9.440] not-for-profit associations, [9.250], [9.420] procedure for incorporation, [9.440] public officer, [9.460] registration, [9.250], [9.430], [9.440] registrable Australian bodies, [9.30] reporting obligations, [9.477] restructure, [9.480] Royal Charter, incorporation by, [9.250] separate legal entity, [9.450] statement of purposes, [9.450] tiered system (Victoria), [9.475] audit, and, [9.477] reporting obligations, [9.477] transfer of incorporation, [9.490] direct transfer, [9.500] winding up, [9.540] distribution of surplus assets, [9.550] reasons for, [9.530] Independent contractors copyright ownership, [8.260] journalists, [8.290] Indoor management rule [12.50], [12.100], [12.240]–[12.260] constructive notice, and, [12.260] overview, [12.240] relevance, [12.250] Industry codes of conduct franchising, [8.2790]

Index

competitions and lotteries [2.260], [2.265] domestic agreements, [2.230]–[2.260] family arrangements [2.250], [2.255] letters of comfort [2.310] marriage, agreements in [2.240] purpose [2.220] requirement for [2.220] social or domestic agreements, [2.230]–[2.260] voluntary agreements [2.270]

Industrial relations industrial disputes anti-competitive practices [5.260], [5.270] boycotts [5.260] overview [1.630] Injunctions Australian Consumer Law [5.830] copyright infringement, [8.1110] Insolvency meaning [13.780], [19.10] ratification not available [13.1390] reasonable grounds for suspecting [13.800] Insolvent trading [19.470] breach of duty to prevent [13.830] defences [13.840]–[13.846] civil penalties [13.830] civil remedies [13.830] compensation orders [19.280] corporate groups [9.970] criminal penalties [13.500], [13.830] defences [13.840]–[13.846] directors’ duty to prevent [13.360], [13.780] breach [13.830] business judgment rule not applicable [13.760] general duty of care, overlap with [13.820] directors’ state of mind [13.810] dishonesty element [13.500], [13.830] disqualification of directors [13.270] expectation of solvency [13.840]–[13.842] holding company liability [9.970] lifting corporate veil [9.920] liquidator claim by [19.270] litigation insurance [19.280] reasonable grounds for suspecting insolvency [13.800] requirements [13.790] what constitutes [13.790] Insolvent transactions — see Voidable transactions Inspection of company books former directors [13.300] members’ right [14.340], [14.350] Smartec Capital Pty Ltd v Centro Properties Ltd, [14.355] replaceable rules, [10.50] Intellectual property franchising, and, [8.2770] overview, [8.10] Intention administrative arrangements [2.290] ambiguity as to [2.300] charity agreements [2.270] commercial agreements, [2.280]–[2.310]

| J

Internal management rule [14.390] Internal rules articles of association, [10.130] companies registered pre-1 July 1998, [10.20] director’s breach of duty, excusing [13.1410] memorandum of association, [10.120] modification bona fide, in interests of whole company [14.320] conflicts between members giving rise to [14.310] expropriation of shares [14.280] fraud on the minority [14.230]–[14.380] onus of proving compliance [14.300] proper purpose [14.300] relevant law [14.290] requirements for validity [14.300]–[14.320] right to challenge [14.220] nature of, [10.10] personalised, [10.10] pre-1 July 1998, [10.110], [10.140] share issue restrictions, [15.200] sources, [10.20], [10.30] statutory provisions, [10.30] International agreements copyright protection, [8.1550] TRIPS agreement, [8.1560] domestic law, and [1.560] overview [1.560] patents, [8.2170] trade marks, [8.2550] Internet service providers copyright infringement, [8.1260] Intoxicated person contractual capacity [2.510]

J Joint venture company, constitution limiting powers, [10.210] partnership [9.80] unincorporated [9.330], [9.350] Journalists copyright ownership, [8.270], [8.280] newspaper proprietor, [8.260], [8.290] 925

Business and Corporate Law Judiciary separation of powers [1.550] administrative tribunals, and [1.550]

L Law classification of law [1.580] civil law [1.730], [1.740] criminal law [1.620], [1.730], [1.750] private law [1.650]-[1.720] public law [1.590]-[1.640] origins [1.30] overview [1.10] purpose of law [1.10] sources of law [1.350], [1.400] common law [1.360] delegated legislation [1.430] equity [1.370] international law [1.560] statute law [1.380] Law reports [1.60], [1.360] Lay-by sales [5.720], [5.750] Legal history Aboriginal customary law [1.260] Australia [1.70] colonial parliaments [1.120], [1.130] colonial rule [1.100] colonisation [1.80], [1.90] Constitution [1.140]-[1.190] doctrine of reception [1.80] dominion, as [1.140], [1.200] extraterritorial laws [1.200], [1.220] New South Wales [1.90]-[1.130], [1.200] reception of English law [1.80] self-government [1.110], [1.120], [1.140] sovereignty [1.220] terra nullius [1.80], [1.230] Australia Acts [1.220] common law [1.40], [1.70] doctrine of precedent [1.40], [1.50], [2.240] equity, and [1.50], [1.60] merger with equity [1.60] Constitution [1.140] branches of government [1.140] concurrent powers [1.160] conflicting laws [1.160], [1.170] exclusive powers [1.175] High Court [1.140], [1.190] legislative powers [1.150]-[1.190] residual powers [1.190] equity [1.50], [1.60], [1.70] merger with common law [1.60] New South Wales [1.60], [1.110] remedies [1.50] law reports [1.60] native title [1.260] extinguishment [1.250], [1.260] legislation, amendment [1.250]-[1.260] 926

Mabo case [1.230], [1.240] recognition [1.230], [1.240] terra nullius [1.80], [1.230], [1.240] test cases [1.260] Wik case [1.250] New South Wales [1.90], [1.200] application of English laws [1.90], [1.110] equity [1.60], [1.110] Chief Justice [1.100] Constitution [1.120] Legislative Council [1.100] Parliament [1.120] self-government [1.110], [1.120] overview [1.40] Privy Council appeals [1.190] abolition [1.210], [1.220] states and territories [1.270] Australian Capital Territory [1.340] New South Wales [1.90]-[1.130], [1.200] Northern Territory [1.330] Privy Council appeals [1.210], [1.220] Queensland [1.290] South Australia [1.310] Tasmania [1.320] Victoria [1.300] Western Australia [1.280] statute law [1.70] Legal profession negligence cases [6.980] “reasonable prospect of success” [6.980] New South Wales [6.980] Legality of contracts consequences of prohibited agreements [3.360] illegal contracts [3.370] void contracts [3.380] illegal contracts [3.270] common law, at [3.310]–[3.312] consequences of [3.370] statute, by [3.290]-[3.300] overview [3.260] restraint of trade [3.330]–[3.335] employment contracts, in [3.350]–[3.357] sale of business contracts, in [3.340] severance of clauses [3.360] statutory illegality [3.280] terminology [3.260] void contracts [3.270] common law, at [3.320] consequences of [3.380] statute, by [3.305] Legislative Assemblies [1.400] Legislative Councils [1.100], [1.400] Liability administrators [19.80] contract law, [12.20], [12.270] authority, [12.20], [12.40], [12.180], [12.220]

| M

Index Liability — cont balancing of rights, [12.20] defence of lack of authority, [12.20] general requirements, [12.30] statutory assumptions, [12.90], [12.160] summary, [12.270] criminal — see Criminal liability personal liability for corporate fault [13.305] Aboriginal and Torres Strait Islander corporations, [12.12] indemnity, [13.1410] legislative reform, [13.848] North Australian Aboriginal Family Violence Legal Services Aboriginal Corporation (NAAFVLS), [12.12] vicarious, [12.360] criminal law, [12.310] tort, [12.300] Liens overview [4.420] sale of goods legislation [4.420] Limitation of actions breach of contract [6.30] Limited liability partnership [9.135] Linked credit providers [5.860] Mabo case [1.230], [1.240] Liquidation — see Winding up Listed public company Corporate Governance Principles [13.80] AGM [11.70]–[11.90] ASX Listing Rules — see ASX Listing Rules constitution, requirement to have, [10.70] disclosure of interests in [14.110] margin loans [13.120] members [14.30] transfer of shares [14.180] true ownership of shares, obtaining information about [14.110] Loan capital authority to borrow money [17.20] debentures — see Debenture debt/equity distinction [17.30], [17.40] equity capital distinguished [17.30], [17.40] overview [17.10] personal property securities — see Personal property securities regulation of [17.10] subordinate debt [17.230] Loyalty and good faith, directors’ duties of — see also Good faith in the interests of company, directors’ duty to act in civil penalties [13.1270] common law remedies [13.1260]

criminal liability [13.1280] objective test [13.1283] fiduciary relationship [13.330], [13.870] outline [13.350], [13.860] overview [13.340]–[13.350], [13.850]–[13.980] persons to whom duties owed [13.870]

M Magna Carta [1.70] Managed investment scheme listed true ownership of interests, obtaining information about [14.110] unlisted registered scheme profile statement [18.150] Management banning order [13.440], [13.480] Margin loans [13.120] Manufacturers defective products [5.790], [6.640], [6.730] exclusion clauses [6.740] Marriage [1.180] Meetings Aboriginal and Torres Strait Islander corporations, [11.12] AGM — see Annual general meeting company, [11.10], [11.60] directors — see Directors’ meeting members — see Members’ meeting unanimous consent, doctrine of, [11.340] Member — see also Shareholder agreement to become 20] allotment of shares [14.20] assertion of membership [14.90] becoming [14.20] ceasing to be company limited by guarantee [14.60] company limited by shares [14.50] company as member of another company [14.10] denial of membership [14.90] directors’ duty of good faith to [13.870], [13.910] disclosure of interests [14.110] Duomatic principle, [11.340] maximum number [14.10] meetings — see Members’ meeting minimum number [14.10] minors [14.10] proprietary company [14.10], [14.30] public company [14.10], [14.30] restrictions [14.30] shareholders as [14.10] 927

Business and Corporate Law Member — cont transfer of shares — see Transfer of shares true ownership of interests [14.110] trustees holding shares for others [14.110] unanimous consent, doctrine of, [11.340] who are [14.10] Members’ meeting — see also Annual general meeting; General meeting AGM — see Annual general meeting body corporate representatives [11.300] class meetings [11.180] conduct of [11.280], [14.280] counting votes [11.290] extraordinary — see General meeting flowchart of issues [11.300] irregularities [11.320], [11.340] notice [11.210] contents [11.230] directors’ duty to provide information [11.230] listed public company [11.210] manner of giving [11.220] poll, demanding [11.290] procedural irregularities [11.320] proxies [11.300], [11.310] quorum [11.270] replaceable rules [10.50], [11.270], [11.310] resolutions member-initiated [11.260] ordinary [11.240] special [11.250] right to receive notice and attend [15.20] single members companies [11.190] technology, use of [11.280] types [11.200] voting rights [11.290], [15.20] Members’ rights and remedies alternative capacity, claim in [14.830]–[14.840] class actions [14.210], [14.740] contract, rights conferred by [14.380] correction of register [14.360] derivative action — see Derivative action diverging interests [14.200], [14.410], [14.850] enforcement of personal rights [14.390] Foss v Harbottle, rule in [14.390] fraud on the minority — see Fraud on the minority general law [14.200], [14.220] injunction [14.340], [14.690]–[14.720] conduct caught by s 1324 [14.700] when person can apply [14.720] who may apply [14.710] insolvent company, claim against [14.830] inspection of books [14.350] internal management rule [14.390] internal rules challenging modification of [14.220], [14.290]–[14.300] rights conferred by [14.200] legal proceedings [14.200] minority members 928

fraud on — see Fraud on the minority protection of [14.850] oppression — see Oppression overview [14.200] personal actions [14.210] personal rights under general law [14.220] personal rights under statute [14.330], [14.340] contract, conferred by [14.380] correction of register [14.360] enforcement of [14.390] inspection of books [14.350] variation [14.370] poll, demanding, [11.290] procedural irregularities [14.730] representative actions [14.210] restitution rights [14.830]–[14.840] statutory remedies [14.210], [14.340] derivative action — see Derivative action injunction [14.640]–[14.670] irregularities [14.730] suing directors for breach of duties [14.220] terminology [14.210] voting at general meetings [14.200] protection of voting rights [14.220] Memorandum of association constitution of pre-1998 company, [10.140] internal rules prior to 1 July 1998, [10.130] Mentally incapacitated person contractual capacity [2.510] Minors contractual capacity [2.430] common law position, [2.440]–[2.480] New South Wales [2.490] South Australia [2.500] torts [2.480] valid contracts [2.450], [2.455], [2.540] void contracts [2.470], [2.540] voidable contracts [2.460], [2.465], [2.540] Minute books [11.280] Misleading or deceptive conduct franchising, [8.2800] Misrepresentation disclosure documents [18.290] fraudulent, damages for [18.310] negligent, damages for [18.320] remedies for [18.290], [18.320] rescission [18.300] Mercantile agents overview [4.360] passing of ownership [4.360], [4.370] Mergers anti-competitive effect [5.440]

Index Misleading or deceptive conduct Australian Competition and Consumer Commission [5.570] Australian Consumer Law [5.570], [5.580] carbon pricing [5.586] definition [5.585] elements [5.581]-[5.583] case [5.584] litigation [5.580] effects [5.586] overview [5.570], [5.580] professional advice [6.540] remedies [5.580] statements made to ASX, [13.435] telecommunications sector [5.580] wifi or wireless products [5.580] Misleading statements — see False or misleading statements Mismanagement directors, by, [13.320] Misrepresentation definition [3.110] disclosure documents [18.270] fraudulent, damages for [18.290] negligent, damages for [18.300] remedies for [18.270]–[18.300] rescission [18.280] effect of [3.150], [3.250] exclusion clauses as to, effect of [3.110] exemption clauses, nature of [2.690] fraudulent [3.120], [3.250] general law remedies [3.250] innocent [3.130], [3.250] limit on claims, for [3.155] negligent [3.140], [3.250] silence cannot constitute [3.110] statutory changes to common law [3.250] statutory remedies [3.160], [3.250] Mistake common [3.40], [3.250] consent to contract, influencing [2.10] effect of [3.95] law, of [3.100] mutual [3.50], [3.250] types of [3.30], [3.250] unilateral [3.60] identity of other party, as to [3.70], [3.250] nature of document, as to [3.90], [3.250] terms, as to [3.80], [3.250] Misuse of market power case studies [5.290], [5.300], [5.320] influence on market [5.310] overview [5.280] predatory pricing [5.280] statutory power [5.310] substantial degree of power [5.300] trans-Tasman market [5.330]

| N

Moral rights application of rights, [8.1530] attribution of authorship, [8.1450] false attribution, [8.1460] beneficiaries of protection, [8.1440] buildings, [8.1500] consent provisions, [8.1480] defences, [8.1490] duration of rights, [8.1530] integrity of authorship, [8.1470] nature of rights, [8.1430] overview, [8.1420] performers, [8.1410] remedies for infringement, [8.1510], [8.1520] Motor vehicle accidents negligence [6.750] assumption of risk [6.830] res ipsa loquitur [6.340] statutory limits [6.750]

N Name of company ASIC Identical Names Check [9.840] “Limited”, use of [9.820], [9.130] passing off [9.840] restrictions [9.840] unacceptable [9.840] National Competition Council about [5.45] National Guarantee Fund [14.170] Native title extinguishment [1.250], [1.260], legislation [1.250] Mabo case [1.230], [1.240] overview [1.260] pastoral leases [1.250] recognition [1.230], [1.240] terra nullius [1.80] rejection of concept [1.230], [1.240] test cases [1.260] Wik case [1.250] Necessity defence to intentional tort [6.230] Negligence assumption of risk [6.700], [6.830] causation [6.440] “but for” test [6.440], [6.450], [6.820] civil liability legislation [6.820] limits of test [6.450] civil liability legislation [6.770] amendments [6.770] apologies, effect [6.970] assumption of risk [6.830] 929

Business and Corporate Law Negligence — cont background to introduction [6.770] causation [6.820] contributory negligence [6.880] criminals [6.940] dangerous recreational activities [6.840], [6.850] duty of care [6.810], [6.860] economic losses [6.890] good samaritans [6.950] intoxication [6.930] legal profession [6.980] limits on damages [6.890] mental harm [6.900] negligence, definition [6.800] nervous shock [6.770] New South Wales [6.770], [6.790]-[6.980] non-delegable duty [6.870] non-economic losses [6.890] obvious risk [6.830] organisation of Act [6.790] professional negligence [6.860] proportionate liability [6.910] public authorities [6.920] self-defence [6.940] state and territory acts [6.780] volunteers [6.960] class action, [14.740] contributory negligence [6.710] civil liability legislation [6.880] damages [6.460] contributory negligence [6.710] motor vehicle accidents [6.750] proportionate liability [6.910] pure economic loss [6.490] statutory limits [6.890] dangerous recreational activities [6.840] case study [6.850] defective products [6.640] defective structures [6.560] defences [6.690] contributory negligence [6.710], illegal enterprise [6.720] professional negligence [6.860] voluntary assumption of risk [6.700] definition [6.60], [6.800] duty of care [6.250], [6.270], [6.570] abnormal persons [6.380] bailees [6.680] burden of proof [6.390] civil liability legislation [6.810], [6.860], [6.870] defective structures [6.560] directors [5.470] existence of duty [6.250], [6.280], [6.290], [6.300] forseeability of harm [6.260], [6.410] negligent misstatement [6.500], [6.530], [6.540] nervous shock [6.370] non-delegable duty [6.650]-[6.670], [6.870] occupiers of premises [6.580]-[6.610] parents [6.620] 930

professional persons [6.550], [6.860] proximity [6.270], [6.300]-[6.330], [6.350], [6.370], [6.540] public authorities [6.630] reasonable foreseeability [6.270], [6.300], [6.370] recognised relationships [6.360] reliance [6.300] standard of care [6.400]-[6.430] elements [6.270] exclusion clauses [6.740] good samaritans [6.950] intoxication [6.930] lifting corporate veil [9.920] motor vehicle accidents [6.750] assumption of risk [6.830] res ipsa loquitur [6.340] neighbour principle [6.250] Donoghue v Stevenson [6.260] nervous shock [6.370] statutory limitations [6.770] occupiers’ liability [6.580] case studies [6.590], [6.600] limits on liability [6.610] overview [6.60], [6.250] professional persons [6.550], [6.860] standard of care [6.860] statutory defence [6.860] proximity [6.270], [6.300] applicability [6.350] assumption of responsibility [6.350] causal proximity [6.330] circumstantial proximity [6.320] negligent misstatement [6.540] nervous shock [6.370] new or original areas [6.300], [6.350] occupiers’ liability [6.580], [6.590], [6.600] physical proximity [6.310] public authorities [6.630], [6.920] pure economic loss [6.490] cautious approach [6.490] defective structures [6.560] limits on liability [6.490] negligent misstatement [6.500]-[6.540] professional undertakings [6.550] reasonable foreseeability [6.490] reliance [6.300] reasonable foreseeability [6.270], [6.300], [6.460], [6.480] case study [6.470] eggshell rule [6.480] nervous shock [6.370] occupiers’ liability [6.580], [6.590], [6.600] pure economic loss [6.490] remoteness of damage [6.460], [6.470], [6.480] res ipsa loquitur [6.340] scope of negligence [6.270] standard of care [6.400] forseeability of harm [6.410] inexperience or lack of knowledge [6.430] magnitude of harm [6.420] professional negligence [6.860]

Index

application of English laws [1.90], [1.110] equity [1.60], [1.110], [1.370] Chief Justice [1.100] Constitution [1.120] legislative council [1.100] parliament [1.120] self-government [1.110], [1.120] legal profession [6.980] sale of goods legislation [1.20], [4.20], [4.30] supreme court [1.100] equity division [1.110], [1.370]

Negligence — cont reasonable person standard [6.400], [6.430] time limits for actions [6.30] vicarious liability [6.620], [6.870], [12.360] non-delegable duty, and [6.870] volunteers [6.960] Negligent misstatement auditors [6.540] case study [6.510] contracts [6.500] developments in law [6.500] duty of care [6.500], [6.530] auditors [6.540] limits on liability [6.530] overview [6.500] principles [6.520] proximity [6.540] reliance on information [6.520] scope of liability [6.540] Negotiable instruments overview [1.690] Nervous shock duty of care [6.370] intentional infliction [6.120] negligence [6.370] statutory limitations [6.770] New South Wales civil liability legislation [6.770] amendments [6.770] apologies, effect [6.970] assumption of risk [6.830] background to introduction [6.770] causation [6.820] contributory negligence [6.880] criminals [6.940] dangerous recreational activities [6.840], [6.850] duty of care [6.810], [6.860], [6.870] economic losses [6.890] good samaritans [6.950] intoxication [6.930] legal profession [6.980] limits on damages [6.890] mental harm [6.900] negligence, definition [6.800] nervous shock [6.770] non-delegable duty [6.870] non-economic losses [6.890] organisation of Act [6.790] professional negligence [6.860] proportionate liability [6.910] public authorities [6.920] self-defence [6.940] volunteers [6.960] court system historical background [1.100], [1.110] supreme court [1.100], [1.110] legal history [1.90], [1.200]

| O

No liability company change of status [9.700] constitution, [10.70] limiting powers, [10.210] name [9.630] overview [9.580], [9.610] Non-corporate forms of association comparison [9.350] joint venture [9.330], [9.350] limited liability partnership [9.135], [9.350] not-for-profit association [9.270], [9.350] partnership — see Partnership sole trader [9.30], [9.350] trust [9.220], [9.350] Northern Territory Commonwealth Constitution, power over [1.185] legal history [1.330] Not-for-profit association AGM fixing membership fees, [11.85] constitution limiting powers, [10.210] definition [9.230] overview [9.270] partnership, compared [9.240] profit, incidental [9.240] purpose of [9.240] Nuisance private nuisance [6.140] public nuisance [6.150]

O Occupational health and safety lifting corporate veil [9.930] vicarious liability [12.360] Offer — see also Acceptance; Consideration; Intention advertisements [2.50] agreement, as part of [2.10] auction sales [2.60] catalogues [2.50] communication of [2.80] counter-offers [2.170] 931

Business and Corporate Law Offer — cont cross-offers [2.90] definition [2.10] electronic communications [2.210] invitation to treat distinguished [2.30] rules of [2.20], [2.100], [2.105] shop displays [2.50] tenders [2.70] termination of [2.100], [2.105] terminology [2.10] world at large, to [2.40] Offer information statement — see also Disclosure documents content of [18.140] lack of knowledge defence [18.270] overview [18.60], [18.90] Officer (of corporation) definition [13.140], [13.380] director — see Director directors’ duties applicable to [13.380] One-person company director [13.170] Salomon case [9.870], [9.890] separate legal entity [9.870] Oppression abuse of process [14.600] act or omission by company or class of members [14.500] affairs of company, conduct of [14.500] breach constitution, of, [10.250] of directors’ duties [13.450] cases successful [14.510]–[14.600] unsuccessful [14.610]–[14.670] conduct covered by s 232 [14.440] controlling member gains [14.530] court order [14.480], [14.680] who may apply [14.490] discrimination [14.620] dismissal of managing director [14.670] dividends failure to pay [14.560] policy, failure to renew [14.560] exclusion from management [14.580], [14.490] gains by directors [14.540], [14.680] good faith, effect [14.620] inaction by directors and company [14.520] information, failure to provide [14.590] low profitability [14.640] members’ right to relief [14.200] no departure from contractual position, [14.675] ratification not available [13.1390] refusal to inspect accounts [14.650] to purchase shares [14.630] register of members, significance [14.100] remedies [14.400], [14.480], [14.680] 932

right to seek [14.340], [14.490] winding up [14.750]–[14.820] resolution by company or class of members [14.500] uncommercial loans, [14.570] voting rights, restricting, [14.550] Options [15.240] Organic theory criminal liability [12.320] case law, [12.330], [12.340] directing mind and will of company [12.290], [12.320] tort liability [12.280]

P Parallel importation copyright, [8.490], [8.500] relaxation of restrictions, [8.510] books, [8.520] computer software, [8.550] electronic items, [8.560] labels or packaging, [8.530], [8.540] sound recordings, [8.1000] Parliamentary Joint Committee on Corporations and Financial Services [9.690] Partner — see also Partnership authority to bind firm, [9.110] case law, [9.115] contract, liability in, [9.50], [9.120] holding out person as, [9.140] case law, [9.150] liability of, [9.50], [9.120], [9.350] contract, [9.120] incoming and outgoing partners, [9.190] joint and several, [9.130] limited, [9.135] tort, [9.130] members of firm, apparent, [9.190] relationship between, [9.160] rights and duties, [9.50], [9.160] tort liability, [9.130] Partnership — see also Partner ABN, [9.70] agreement, [9.50], [9.160] assignment of share in, [9.160] business name, [9.70] carrying on business in common, [9.90], [9.240] case law, [9.100] contract, based on, [9.50] definition, [9.50], [9.90] disclosure requirements, [9.350] dissolution, [9.200] consequences, [9.210]

Index Partnership — cont finance, [9.350] firm, [9.70] formation, [9.70] legal basis and nature, [9.50], [9.80] limited liability partnership, [9.135] maximum size, [9.80], [9.350] net profits, share in, [9.90] not separate legal entity, [9.80] other entities, compared, [9.240], [9.350] property, [9.170] case law, [9.180] statutory regulation, [9.60] taxation, [9.350] termination, [9.200] consequences, [9.210] transferability of interest, [9.160], [9.350] view to profit, [9.90] what constitutes, [9.90] Passing off [9.840] character merchandising, [8.2600] case examples, [8.2610]-[8.2630] elements of action, [8.2560] examples, [8.2570]-[8.2590] overview, [8.2560] remedies, [8.2680] trade marks, [8.2690] well-known persons, connection to, [8.2640]-[8.2670] Patents acceptance, [8.2010] computer programs, [8.1850] damages, [8.2120] employee inventions, [8.2150] university academics, [8.2150], [8.2160] examination, [8.2000] innovation patents, [8.2060] re-examination, [8.2030] exclusive rights, [8.2100] foreign patents, [8.2170] infringement, [8.2110] innovation patents, [8.2070] remedies, [8.2120] innovation patents, [8.1790], [8.2050] certification for infringement, [8.2070] examination, [8.2060] standard patents, differences, [8.2060]-[8.2090] term of patent, [8.2090] validity requirements, [8.2080] inventive step requirement, [8.1900] application of test, [8.1900] legislation, [8.1780] manner of manufacture, [8.1820] medical treatment methods, [8.1830] microbiological processes, [8.1840] nature of patents, [8.1790] novelty requirement, [8.1870] assessment of novelty, [8.1890] prior art base, [8.1880] reverse infringement test, [8.1890]

| P

opposition to grant, [8.2020] overview, [8.10], [8.1780], [8.1790] plant varieties, [8.1860] procedure for obtaining, [8.1930] acceptance and publication, [8.2010] applicants, [8.1930] applications, [8.1940], [8.1970] examination, [8.2000] priority date, [8.1990] provisional applications, [8.1940], [8.1960], [8.1990] specifications, [8.1950]-[8.1980], [8.1990] publication, [8.2010] Register of Patents, [8.2140] remedies, [8.2120] revocation of patent, [8.2130] secret use, [8.1920] specifications, [8.1950] complete, [8.1970], [8.1980], [8.1990] priority date, [8.1990] provisional, [8.1960], [8.1990] standard patents, [8.1790] grant of patent, [8.2040] innovation patents, differences, [8.2060]-[8.2090] opposition to grant, [8.2020] term of patent, [8.2040] subject matter, [8.1800] threshold requirement, [8.1810] types of patents, [8.1790] usefulness of invention, [8.1910] Perpetual succession [9.850], [13.240] Personal property choses in possession [4.90] overview [4.90] Personal property securities charges (former) [17.130], [17.140] circulating assets [17.140], [17.150] harmonised legislative regime [17.120] Corporations Act amendments [17.130] purpose [17.120] overview [4.545] priority, obtaining [17.200], [17.205] Re Maiden Civil (P&E) Pty Ltd [17.205] priority rules [17.195] reforms [4.545] registration of [17.180] effective/defective [17.190]–[17.200] PPS Register [17.180], [17.190], [17.210] retention of title clauses [4.545] retention of title (Romalpa) clauses under [17.160] security interest, definition [4.545] security interests (formerly “charges”) [17.130] circulating asset, over (floating charge) [17.130], [17.140] definition [17.170] determining existence of [17.150] non-circulating asset, over (fixed charge) [17.130], [17.140] 933

Business and Corporate Law Personal property securities — cont transitional arrangements [17.220] Whittaker Report [17.240] Personal Property Securities Register Australian Financial Security Authority [4.545] security interests [4.545] Security Agreement [17.150] security interests (formerly “charges”) [17.130] circulating asset, over (floating charge) [17.130], [17.140] definition [17.170] determining existence of [17.150] non-circulating asset, over (fixed charge) [17.130], [17.140] transitional arrangements [17.220] Phoenix company [9.910] Predatory pricing [5.280] Price fixing case studies [5.150], [5.160] contract, arrangement or understanding [5.140], [5.150], [5.160] covenants [5.210] overview [5.140] Price signalling [5.170] Pricing Australian Consumer Law [5.700] predatory pricing [5.280] recommended retail price [5.400] resale price maintenance [5.400], [5.420] case study [5.410] evidentiary requirements [5.420] inducements [5.400] loss leadering [5.430] statement, meaning [5.420] Private law business entities [1.720] commercial law [1.670] contract law [1.660] employment contracts [1.630] negotiable instruments [1.690] overview [1.580], [1.650] property law [1.700] succession [1.710] torts [1.680] Privity of contract definition [2.720] exceptions to agency exception [2.760] apparent exceptions, [2.740]–[2.770] insurance exception [2.730] real exception [2.730] trust exception [2.750] overview [2.720] 934

terminology [2.720] Privy Council right of appeal [1.190] abolition [1.210], [1.220] state supreme courts [1.210], [1.220] Product safety — see also Defective products Australian Consumer Law [5.770], [6.730] exclusion clauses [6.740] overview [5.770], [6.730] Productivity Commission recommendations [5.770] Professional advice — see also Negligent misstatement implied warranties [6.540] misleading or deceptive conduct [6.540] Professional persons breach of contract [6.550] duty of care [6.550], [6.860] standard of care [6.860] statutory defence [6.860] Profile statement, — see also Disclosure documents approval for use [18.70], [18.150] content [18.150] unlisted registered schemes [18.70], [18.150] Proper purpose, directors’ duty to use powers for civil penalties [13.1270] common law remedies [13.1260] context [13.990] criminal penalty [13.1080], [13.1280] objective test, [13.1283] description [13.1000], [13.1080] fiduciary duty [13.870], [13.1010] general law duty [13.1010] good faith and [13.1080] onus of establishing breach [13.1020] persons to whom duty owed [13.870] purpose actual [13.1020], [13.1040] legal [13.1020], [13.1030] multiple purposes [13.1050] replaceable rules [13.990] scope of duty [13.1030] statutory source [13.1000], [13.1080] Property overview [1.700] Property law overview [1.700] Proprietary company AGM [11.70], [11.80] audit requirement relief [9.680] change of status [9.700]

Index Proprietary company — cont classification according to size [9.660], [9.690] company secretary, appointment, [13.170], [13.190] definition [9.630] directors — see Directordisclosure of interests in, [14.110] financial reports — see Financial reports disclosure of interests in [14.110] large audit requirement relief [9.680] definition [9.660] reporting obligations [9.670] limited by guarantee [9.580], [9.600] by shares, [9.580], [9.590] members number of [14.10] restrictions [14.30] name, [9.630] number registered, [9.695] public company, compared, [9.630] replaceable rules, [10.50], [10.80] secretary, optional [14.170], [14.190] small definition [9.660] Small Business Guide, [9.640] unlimited, [9.620] Prospectus — see also Disclosure documents advertisements [18.190] application form [15.90], [18.120] ASIC’s powers [18.210] 2015 report [18.210] content [18.120] electronic format [18.120] exclusions [18.100], [18.110] form [18.120] general disclosure test [18.120] liability where defective [18.220] civil [18.240] criminal [18.230] defences [18.250], [18.280] listed securities, offer of [18.130] misrepresentation fraudulent, damages for [18.310] negligent, damages for [18.320] remedies under general law [18.290], [18.320] rescission [18.300] modification of provisions by ASIC [18.210] object of legislation [18.30] reforms [18.30] offers requiring disclosure [18.100] public companies [18.20] purpose [15.80], [18.30] replacement [18.180] securities covered [18.100] short form [18.50], [18.90], [18.120] supplementary [18.180] transaction-specific [18.50], [18.130] when required [18.100] Proximity applicability [6.350]

| R

assumption of responsibility [6.350] causal proximity [6.330] circumstantial proximity [6.320] negligent misstatement [6.540] nervous shock [6.370] new or original areas [6.300], [6.350] occupiers’ liability [6.580], [6.590], [6.600] overview [6.270], [6.300] physical proximity [6.310] Public authorities duty of care [6.630] negligence [6.630], [6.920] Public company AGM [11.70], [11.80] ASX listed — see Listed public company directors — see Director change of status [9.700] company secretary, appointment [13.170], [13.190] corporate governance standards [13.130] definition [9.630] financial reports — see Financial reports listed — see Listed public company members number of [14.10] restrictions prohibited [14.30] no liability company [9.610], [9.630] number registered [9.695] ongoing requirements [9.160] proprietary company, compared [9.630] replaceable rules, [10.50], [10.80] secretary [14.170], [14.190] Public law administrative law [1.600] constitutional law [1.610] criminal law [1.620] industrial law [1.630] overview [1.580], [1.590] revenue law [1.640] Pyramid selling [5.690]

Q Queen [1.400] Queensland legal history [1.290]

R Ramsay Report [13.90] Receiver — see Receivership Receivership appointment of administrator [19.30] 935

Business and Corporate Law Receivership — cont controller, appointment of charge holder, by [19.370] compliance with terms of security interest [19.370] court, by [19.330], [19.380] distinctions between types [19.320] effect [19.390] managing [19.360] person in possession of property [19.350] powers and duties [19.400] privately appointed [19.400] receiver [19.330] receiver and manager [19.340] voluntary administration, during [19.290] overview [19.310] property, control of [19.350] receiver [19.310], [19.330] liability [19.410] receiver and manager [19.340] liability [19.410] reporting requirements [19.360] winding up application during [19.300] Reduction of capital — see Capital reduction Referral selling [5.710] Referendums constitutional change [1.570] Register Aboriginal and Torres Strait Islander corporations, [9.12] debenture holders [17.60] members — see Register of members members’ right to correct [14.340], [14.360] PPS Register [17.180], [17.190], [17.210] Register of members assertion of membership [14.90] correction [14.80] case law, [14.85] members’ right [14.340], [14.360] court’s power to create, [14.72] denial of membership [14.90] improper purpose test, [14.78] inspection, [14.70] application for, [14.78] Corporations Act amendments, [14.78] fee, [14.74] rights, [14.78] location [14.70] oppression cases, role in [14.100] predatory behaviour, protection from, [14.76] requirement to keep [14.70] share capital, specification of [15.60] significance [14.90] use without approval [14.70] Corporations Act amendments, [14.78] predatory behaviour, [14.76] 936

Registered office [9.460], [9.770], [9.820], [14.70] Register of members share capital, specification of [15.60] Registration ABN [9.810] ACN [9.810] application form [9.870] ARBN [9.810] certificate [9.780] company coming into existence on [A9.770], [9.850] foreign [9.740] name, [9.820], [9.840] pre-existing, [9.720] proprietary limited, [9.770] shelf [9.760], contracts entered before — see Pre-registration contract Corporations Act, under [9.560], [9.710] effect of [9.850], [9.860] Electronic Company Registration (ECR) service [9.770] incorporation on [9.750] not-for-profit associations, [9.250], [9.430], [9.440] personal property securities effective/defective [17.190]–[17.200] PPS Register [17.180], [17.190], [17.210] procedure [9.770], [9.790] registered office [9.800] registrable Australian bodies [9.730] requirement for [9.710] security interests in personal property [17.120]–[17.150] Regulations [1.430] Related party transactions ASIC v Adler [13.1370] civil penalty provision [13.1370] exceptions to prohibition [13.1370] financial benefit, giving [13.1370] protection of members’ interests [13.1370] regulation of [13.1370] related parties, definition [13.1370] summary flowchart [13.1370] Remedies Australian Consumer Law [5.830] consumer guarantees [5.850] pecuniary penalties [5.820] unfair contract terms [5.950] breach of contract, for [3.600] Competition and Consumer Act [5.70] confidential information, [8.2740] consumer guarantees [5.850] copyright infringement, [8.1100] access to encoded broadcasts, [8.1320] account of profits, [8.1140], [8.1150], [8.1160], [8.1170]

Index Remedies — cont anti-circumvention provisions, [8.1290] conversion or detention, [8.1220], [8.1230] damages, [8.1120], [8.1130], [8.1180]-[8.1210], [8.1220] delivery up, [8.1240] electronic rights management information, [8.1310] injunctions, [8.1110] moral rights, [8.1510], [8.1520] performers’ rights, [8.1370] damages [3.610]–[3.615] liquidated damages clauses [3.670]–[3.675] losses recoverable [3.650]–[3.655] penalties [3.670]–[3.675] design infringement, [8.1670] equitable remedies [1.50] historical background [1.50] injunction [3.690] limitation of actions [3.700] statute-barred debts [3.710] misleading or deceptive conduct [5.580] mitigation of loss [3.630] moral rights, [8.1510], [8.1520] passing off, [8.2680] trade marks, [8.2690] patent infringement, [8.2120] remoteness of loss [3.620]–[3.625] restitution — see Restitution sale of goods legislation [4.10] buyers [4.550] sellers [4.480]-[4.500] specific performance [3.680] terminology [3.600] trade marks, [8.2450] passing off, [8.2690] unconscionable conduct [5.590] unfair contract terms [5.950] Replaceable rules application, [10.60] best practice, reflecting, [10.40] binding on parties, [10.150] breach of, [10.30], [10.250] companies to which applicable, [10.30] pre-1998, [10.60], [10.140] proprietary, [10.50], [10.80] public, [10.50], [10.80] single director/shareholder, not applicable to, [10.30], [10.100] constitution displacing or modifying, [10.180] contractual effect, [10.150] enforcement, [10.250] failure to comply, [10.30] internal rules, [10.20] list of, [10.50] proxies, and, [11.300] quorum for meeting, on, [11.270] statutory provisions, [10.30] Resale price maintenance case study [5.410] evidentiary requirements [5.420]

| R

inducements [5.400] loss leadering [5.430] overview [5.400], [5.420] statement, meaning [5.420] Residential tenancies condition of premises [6.560] Restitution basis of [3.720] definition [3.600] foreign element in contract [3.750] overview [3.600] recovery of money paid [3.730] recovery of reasonable remuneration [3.740] terminology [3.600] Restitution rights of members [14.830]–[14.840] Sons of Gwalia v Margaretic, [14.835] Corporations Amendment response, [14.840] Restraint of trade legality of clause [3.330] employment contracts, in [3.350]–[3.357] sale of business contracts, in [3.340] Retain discretions, directors’ duty to civil penalties [13.1270] common law remedies [13.1260] context [13.1090] criminal liability [13.1280] objective test [13.1283] description [13.1090] internal rules, limitations by [13.1120] scope [13.1110] Retention of title clause [17.160] Revenue law overview [1.640] Rights in personam [1.60] Rights in rem [1.60] , Rights issues [15.250], [18.100] Romalpa clauses [17.160] case study [4.520] limits to clauses [4.530], [4.540] overview [4.510] 937

Business and Corporate Law Royal Assent [1.400] Royal Charter [9.250], [9.370], [9.420]

S Sale of goods legislation — see also Supply of goods or services acceptance by buyer [4.460] applicable contracts [4.30] essential elements [4.50] essential features [4.40] executed contracts [4.60] executory contracts [4.60] goods as subject matter [4.90] legal and valid contracts [4.50] money involved in bargain [4.80] substantive purpose test [4.130] transfer of ownership [4.70], [4.100] application of Act [4.30], [4.140] auction sales [4.710] buyer’s remedies [4.550] caveat emptor [4.720] classification of goods [4.150] ascertained goods [4.190] existing goods [4.160] future goods [4.200] specific goods [4.170] unascertained goods [4.180] computer software [4.100], [4.130] contract for sale of goods, definition [4.40] delays in delivery [4.310] delivery by seller [4.450] delays in delivery [4.310] destruction of goods [4.310] effect of Act [4.140] essential features of contracts [4.40] examples of goods [4.90] excluded contracts [4.70], [4.100] choses in action [4.100] computer software [4.100], [4.130] supply of labour and materials [4.100]-[4.120] goods, definition [4.90] historical background [4.20] implied conditions and warranties [4.140], [4.560], [4.570], [9.330] correspondence with description [4.600] correspondence with sample [4.690] exclusion or limitation [4.700] fitness for purpose [4.610]-[4.630], [4.650], [4.670], [4.680] merchantable quality [4.620], [4.640]-[4.680] title of goods [4.580], [4.590] mistake [11.30], [11.50] nemo dat rule [4.320] statutory exceptions [4.320], [4.330]-[4.440] overview [1.20], [4.10], [4.140] passing of ownership [4.320] buyer in possession after sale [4.430] 938

common law, under [4.440] estoppel [4.340], [4.350] mercantile agents [4.360], [4.370] seller in possession after sale [4.390]-[4.420] statutory power, under [4.440] statutory exceptions [4.320], [4.330]-[4.440] voidable titles [4.380] personal property [4.90] purpose of Acts [4.10] remedies [4.10] buyers [4.550] sellers [4.480]-[4.500] Romalpa clauses [4.510] case study [4.520] limits to clauses [4.530], [4.540] seller’s rights [4.480] against the buyer [4.500] against the goods [4.490] personal property securities [4.545] Romalpa clauses [4.510]-[4.540] supply of labour and materials, distinction [4.100] case studies [4.110], [4.120] terms of contract [4.560] implied conditions and warranties [4.140], [4.560], [9.330] time stipulations [4.470] transfer of ownership [4.70], [4.100], [4.210] case study [4.300] delivery of goods [4.230] future goods [4.290] specific goods [4.210], [4.250]-[4.270] statutory rules [4.240]-[4.290] unascertained goods [4.210], [4.220], [4.290] Schemes of arrangement [11.180], [13.1280], [18.100] class meetings, [11.180] creditors’ [19.420] members’ [19.430] Secretary — see Company secretary Securities hawking [18.200] offer of — see Fundraising personal property — see Personal property securities Security interest circulating asset, over (floating charge) [17.130], [17.140] definition [17.170] determining existence of [17.150] non-circulating asset, over (fixed charge) [17.130], [17.140] Self-defence defence to intentional tort [6.210]

| S

Index Senior manager definition [13.150] Separate legal entity doctrine Aboriginal and Torres Strait Islander corporations, [9.852] corporate groups, [9.960], [9.1020] corporate veil, [9.900], [9.950] case law, [9.950] one-person company, [9.870], [9.37] overview, [9.850], [9.870] Salomon case, [9.870], [9.890] Separation of powers administrative power [1.550] overview [1.550] Share buy-back ability to pay creditors, and [16.310] breach of Ch 2J [16.520]–[16.540] remedies, [16.530] cancellation of shares [16.410] capital reduction and [16.220], [16.300] compliance with procedures [16.310] definition [16.280] disclosure requirements [16.410], [16.420] employee share scheme buy-backs [16.370], [16.410] equal access buy-backs [16.350], [16.420] exempted capital reduction [16.220] fairness [16.320] legislation [16.440] maximum size limit [16.400] minimum holding buy-backs [16.380], [16.410] minimum requirements [16.310] notice of meeting [16.410], [16.420] on-market buy-backs [16.360], [16.410] ordinary resolution [16.410], [16.420] procedures [16.400], [16.410] protection of creditors and shareholders [16.320] reasons for [16.330] regulation [16.390] requirements, [16.290] selective buy-backs [16.190], [16.390], [16.410], [16.430] shareholder approval [16.300] special/unanimous resolution [16.410], [16.430] 10/12 limit [16.400] types of permitted [16.340] Share capital — see also Shares Aboriginal and Torres Strait Islander corporations [15.12], [16.10], [18.12] authorised capital [15.140] capital maintenance doctrine [16.20]–[16.30] debt [15.10] debt to equity ratio [15.10] equity [15.10] gearing [15.10] increasing [15.240], [15.270] issue of shares — see Shares nominal capital [15.140]

par value [15.150] reduction — see Capital reduction specification on registration [15.60] transactions affecting breach of Ch 2J [16.520], [16.530] buy-backs — see Share buy-back capital maintenance doctrine [16.20]–[16.30] financial assistance to purchase own shares [16.450]–[115.500] protection of creditors and shareholders [16.50], [16.100] reduction — see Capital reduction reforms [16.30] remedies for breach of Ch 2J [16.530] self-acquisition [16.230]–[16.270] summary [16.510] valuation [15.160] issue price [15.170] Share issue application form [15.90] cancelling existing rights [15.220] consideration other than cash [15.190] disclosure document [15.80], [15.110] requirements [15.80] improper [15.130] Celtic Capital Pty Ltd v Cityview Corporation Ltd [15.135] internal rules, restrictions in [15.210] minimum subscription condition [15.110] notification to ASIC [15.110] notification to ASX [15.110] pre-emption, right of [15.230] price [15.170] private [15.70] prospectus [15.80], [15.80] public [15.70] publicly listed companies [15.100] requirements prior to [15.110] restrictions [15.200]–[15.230] timeline [15.120] varying existing rights [15.220] Shareholder — see also Member disclosure of interests [14.110] fraud on — see Fraud on the minority listed company [15.100] meetings — see General meeting; Members’ meeting members of company [14.10] protection of — see Members’ rights and remedies rights and remedies — see Members’ rights and remedies substantial holdings [14.120] Shares — see also Share capital allotment [14.20], [15.100] duty to use power for proper purpose [13.1060]–[13.1070] evidence of [15.100] 939

Business and Corporate Law Shares — cont improper motive [13.1075] invalid [13.1070]–[13.1075] anti-competitive acquisitions [5.440] buy-backs — see Share buy-back call options [15.250] calls on [15.180] cancellation ceasing to be member [14.50] takeover context, [16.220] cancellation of share rights share issue cancelling existing rights [15.220] company acquiring own breach of Ch 2J [16.520], [16.530] exceptions to prohibition [16.250] indirectly [16.260], [16.270] prohibition [16.230] reasons for prohibition [16.240] contract for sale of [14.140] debentures converted to [17.90] dividend reinvestment plans [15.470] financial assistance to purchase company’s own breach of Ch 2J [16.520], [16.530] dividend, [16.450], [16.470] exemptions [16.500] financial assistance, meaning [16.470] general restriction [16.450] lifting corporate veil [9.920] material prejudice [16.480] protection of creditors and shareholders [16.460] shareholder approval [16.490] holding statement [15.100] invitation to purchase [15.90] issue — see Share issue nature of [14.40], [15.20] options [15.260] ordinary [15.50] par value [15.150] partly paid [15.180] personal property [14.40], [15.20] pre-emption, right of [15.230] property rights [15.20], [15.30]–[15.40] Beconwood Securities v ANZ Banking Group, [15.40] put options [15.250] replaceable rules [10.50], [15.230] rights attaching to [15.20] rights issues [15.270] securities lending [15.30]–[15.40] security holder reference number (SRN) [14.170], [15.100] substantial holdings [14.120] true ownership, obtaining information about [14.110] trustee holding on behalf of another [14.110] obligations [17.100] types of [15.50] valuation [15.160]–[15.170] issue price, [15.170] 940

variation of class rights — see Variation of class rights voting rights [15.30] Shelf company [9.760] Short-selling [13.130] Single director/shareholder company appointment of another director [13.60] authority to enter contracts, [12.200] constitution, [10.100] death or incapacity of director [13.170] powers of director [13.60] resolutions, [11.40] without meeting, [11.190] replaceable rules not applicable, [10.30], [10.100] Small Business Guide [9.640] Sole trader ABN, [9.30] disclosure requirements, [9.350] finance, [9.350] GST, registration for, [9.30] liability, [9.30], [9.350] nature of, [9.30] taxation, [9.350] South Australia legal history [1.310] Spare parts right of repair defence, [8.1690] Standard of proof civil standard [1.740] criminal standard [6.20] States and territories Australian Consumer Law [5.490] enforcement agencies [5.520] referral of powers [5.510] civil liability legislation [6.780] New South Wales [6.770], [6.790]-[6.980] court systems New South Wales [1.100], [1.110], [1.370] legal history [1.270] Australian Capital Territory [1.340] New South Wales [1.90]-[1.130], [1.200] Northern Territory [1.330] Privy Council appeals [1.210], [1.220] Queensland [1.290] South Australia [1.310] Tasmania [1.320] Victoria [1.300] Western Australia [1.280] legislative powers [1.160], [1.190] concurrent powers [1.160] conflicting Commonwealth laws [1.160], [1.170]

Index narrow or restricted interpretations [1.540] overview [1.450], [1.460] penal statutes [1.540] purpose approach [1.470], [1.500], [1.540] extrinsic materials [1.510], [1.520] intrinsic materials [1.510] state interpretation acts [1.520] taxation acts [1.540]

States and territories — cont consumer protection [5.510] power over [1.180], [1.185] residual powers [1.190], [1.420] sovereignty of parliament [1.380] legislative process [1.410] parliaments [1.400], [1.410] statutory interpretation [1.520] Statutory debt lifting corporate veil case law, [9.950] Statutory law bills [1.405] common law, and [1.450] equity, and [1.450] form of a statute [1.390] historical background [1.70] legislative process [1.400], [1.405], [1.460] overview [1.20], [1.380] royal assent [1.400] sovereignty of parliament [1.380] Statutory assumptions in dealings with companies, authority to exercise powers [12.110] authority to warrant that document genuine [12.110] case law, [12.150], [12.160] close dealings with individuals, where, [12.130] constitution complied with [12.120] dealings with company, meaning [12.100] director/secretary duty appointed [12.110] document duly executed [12.100], [12.120] entitlement to make [12.90], [12.100] exceptions [7.130]–[12.170] holding out to be officer or agent [12.110] officer/agent duty appointed [12.110] post-1 July 1998, [12.150] pre-1 July 1998, [12.140] proper performance of duties [12.110] replaceable rules complied with [12.110] Statutory authority defence to intentional tort [6.240] Statutory duty breach of statutory duty [6.760] Statutory interpretation Acts Interpretation Act [1.520] aids to interpretation [1.530] ambiguities [1.470], [1.540] approaches to interpretation [1.470] Constitution [1.190], [1.420], [2.220] ejusdem generis rule [1.530] extrinsic materials [1.510], [1.520] list of materials [1.520] golden rule [1.470], [1.490] literal rule [1.470], [1.480] mischief rule [1.500]

| T

Statutory torts [6.900]–[6.990] Subsidiary — see Corporate group Succession overview [1.710] Supply of goods or services — see also Sale of goods legislation ability to supply [5.670] Australian Consumer Law [5.590], [5.670], [5.680], [5.710], [5.720], [5.740], [5.750] false or misleading representations [5.620] harassment and coercion [5.710] itemised bills [5.760] proof of transactions [5.760] rebates, gifts or prizes [5.670] unconscionable conduct [5.590] unsolicited consumer agreements [5.720], [5.740] industry specific regulation [5.740] key concepts [5.740] unsolicited supplies [5.680] Supreme courts New South Wales equity division [1.110], [1.370] historical background [1.100], [1.110] Privy Council appeals [1.210], [1.220]

T Takeovers anti-competitive effect [5.440] capital reduction [17.220] disclosure documents exemption [18.100] Tasmania legal history [1.320] Taxation company [9.350] lifting corporate veil [9.930], [9.940] partnership [9.350] sole trader [9.350] statutory interpretation [1.540] trust [9.350] Television and sound broadcasts Australian Consumer Law, [18.20] copyright, [8.750], [8.900] 941

Business and Corporate Law Television and sound broadcasts — cont duration, [8.970] exception to infringement, [8.960] exclusive rights, [8.920]-[8.940] ownership, [8.950] subsistence of copyright, [8.910] time-shifting, [8.960] Terms of contract collateral contracts [2.590], [2.595], [2.610] conditions [4.560] exclusion clauses [2.660] interpretation of [2.700] misrepresentation of nature [2.690] signed contracts, in [2.670] statutory provision, limited or abrogated by [2.710] unsigned contracts, in [2.680] express [2.560] implied [2.620] courts, by [2.630] custom or trade usage, by [2.640] statutory [2.650] intermediate terms [4.560] overview [2.550] parol evidence rule (PER) [2.570] representations distinguished [2.580] sale of goods legislation [4.560] terms not stated in the contract, incorporation of [2.585] types of [2.600] warranties [2.610] [4.560] Terra nullius — see also Native title overview [1.80] rejection of concept [1.230], [1.240] Torts breach of contract, distinction [6.10], [6.30] breach of statutory duty [6.760] corporate liability organic theory, [12.290] vicarious liability, [12.300] conversion [6.170] crimes, distinction [6.10], [6.20] defences [6.190] consent [6.200] defence of others [6.210] necessity [6.230] self-defence [6.210] statutory authority [6.240] unavoidable accident [6.220] elements of a tort [6.50] intentional torts [6.60], [6.80] assault [6.90] battery [6.100] conversion [6.170] defences [6.190]-[6.240] detinue [6.180] list of torts [6.80] false imprisonment [6.110] infliction of nervous shock [6.120] private nuisance [6.140] 942

public nuisance [6.150] trespass to goods [6.160] trespass to land [6.130] lifting corporate veil [9.940] meaning [6.10] negligence — see Negligence overview [1.680], [6.10] partners, liability in, [9.130] statutory torts [6.730], [6.900] good Samaritans [6.960] intoxication [6.940] legal practitioners [6.990] mental harm [6.910] proportionate liability [6.920] public authorities [6.930] self defence [6.950] volunteers [6.970] strict liability [6.50], [6.60] survival of actions [6.70] trespass to land [6.130] defences [6.230], [6.240] unintentional torts [6.60] workers’ compensation, distinction [6.10], [6.40] Trade marks assignment, [8.2510] authorised users, [8.2460] certification marks, [8.2470], [8.2490] collective marks, [8.2470], [8.2480] deceptively similar marks, [8.2400] unregistered marks, [8.2430] defences, [8.2410] similar goods, [8.2410], [8.2420] unregistered marks, [8.2430] defensive marks, [8.2470], [8.2500] definition, [8.2190], [8.2370] exclusive rights, [8.2200] graphical representation, [8.2230] false representation, [8.2330] imported infringing goods, [8.2530] infringement, [8.2380] deceptively similar, [8.2400] functional shape, [8.2380], [8.2390] imported goods, [8.2530] remedies, [8.2450], [8.2690] statutory defences, [8.2410]-[8.2430] substantially identical, [8.2400] interests in marks, [8.2520] international agreements, [8.2550] nature of trade marks, [8.2180] offences, [8.2540] opposition to registration, [8.2280] defective applications, [8.2340] false geographical indication, [8.2330] grounds for opposition, [8.2290] ownership of mark, [8.2300] similar marks, [8.2320] use of mark, [8.2310] overview, [8.10], [8.2180] register, [8.2350] rectification, [8.2360] removal for non-use, [8.2370] registrable marks, [8.2190]

Index Trade marks — cont registration, [8.2350] applications, [8.2210], [8.2340] rejection of applications, [8.2220]-[8.2270] opposition to registration, [8.2280]-[8.2340] term of registration, [8.2350] rejection of applications, [8.2220], [8.2270] confusion or deception, [8.2250] distinguishing goods or services, [8.2240] graphical representation, [8.2230] substantially identical marks, [8.2260] remedies, [8.2450] passing off, [8.2690] substantially identical marks, [8.2260], [8.2400] unregistered marks, [8.2430]

TRIPS Agreement, [8.1560]

Trade Practices Act — see Competition and Consumer Act Commonwealth’s legislative power [1.420] consumer protection [5.10] constitutional limitations [1.420] defective goods or services [6.640], [6.730] false or misleading representations [5.660] overview [5.10] product safety [6.730] renaming of Act [5.10], [9.395] torts, and [6.730]

Two-part simple corporate bonds offers for issue or sale [18.80], [18.90] approval for use [18.80], [18.160] content [18.160] lodgment [18.170]

Transfer of shares ASX Trade [14.160] brokers [14.150] cessation of company membership [14.50] CHESS (Clearing House Electronic Subregister System) [14.170] constitution specifying manner [14.130] contract [14.140] listed [14.150] membership of company [14.20] registration [14.140] refusal to register [14.180]–[14.180] replaceable rules [10.50], [14.130] restrictions [14.30], [14.190] refusal to register [14.180], [14.186] winding up company, [14.190] share certificate [14.140] stamp duty [14.140] unlisted shares [14.140]

Trust company, distinguished [9.220] directors’ duty of good faith to beneficiaries [13.870] disclosure requirements [9.350] finance [9.350] formation [9.220], [9.350] personal liability of trustee [9.220], [9.350] separate entity, not recognised as [9.220] taxation of [9.350] transferability of interest [9.350] unit [9.220] Trustees bankruptcy power of sale [4.440]

U Ultra vires doctrine abolition, [10.220], [10.230] Unavoidable accident defence to intentional tort [6.220] Uncommercial loans [14.530] Unconscionable conduct Australian Consumer Law [5.590] cases [5.590] contracts, in [3.240] franchising, [8.2800] remedies [5.590] statutory provisions [5.590] relevant criteria [5.590] remedies [5.590] supply of goods or services [5.590]

Trespass to land defences [6.230], [6.240] overview [6.130]

Undue influence definition [3.190]–[3.192] effect of [3.220] overview [3.190]–[3.192] presumption regarding [3.190]–[3.192] special relationship where not presumed to exist [3.210] where presumed to exist [3.200] third parties, and [3.230]

Tribunals administrative tribunals separation of powers [1.550]

Unfair contract terms commencement of ACL [5.500] consumer contract, definition [5.880]

Trespass to goods overview [6.160]

| U

943

Business and Corporate Law Unfair contract terms — cont enforcement of regime [5.940] exempt contracts [5.910] overview [5.870] remedies [5.950] standard form contracts [5.890], [5.960] relevant factors [5.900] transparency of terms [5.930] unfair, definition [5.920] Unfair dismissal [9.950] Unfair loans [19.240] Unfair preference [19.240] Unincorporated joint venture [9.330] Unincorporated not-for-profit association, advantages, [9.250] disadvantages, [9.280], [9.320] dissolution of, [9.310] formation of, [9.250], [9.350] lawsuits, [9.290] legal status, [9.280] liability of committee members, [9.290] limitations, [9.280] members’ rights, [9.300] other entities compared, [9.350] overview, [9.270] taxation, [9.350] Universal Copyright Convention, [8.1550] Unlimited company [9.620], [9.700], [15.60] articles of association, [10.130] Unsolicited consumer agreements industry specific regulation [5.740] key concepts [5.740] overview [5.720], [5.740] Unsolicited supplies [5.680]

V Variation of class rights share issue varying existing rights [15.220] Vicarious liability, [12.360] criminal conduct of employees [6.620] criminal law, [12.330] meaning [6.620] non-delegable duty, and [6.870] overview [6.620] tort, [12.310] Victoria legal history [1.300] 944

Voidable transactions, compensation orders [19.280] defences [19.250] identifying [19.260] insolvent transactions [19.240] liquidator, claim by [19.240] litigation insurance [19.280] overview [19.240], [19.260] presumption as to insolvency [19.280] relation back day [19.260] running account [19.250] uncommercial transaction [19.240] unfair loan [19.240] preference [19.240] Voluntary administration administrator — see Administrator conduct of [19.40] court’s power to make orders [19.110] deed of company arrangement [19.100] employee entitlements [9.980], [9.1010] meeting of creditors [19.50], [19.100] moratorium on court actions [19.70], [19.100] object [19.20] protection from creditors [19.70] receiver, appointment during [19.290] secured creditors appointment of administrator [19.60] definition [19.10] right to bring proceedings [19.70] substantial chargees, rights of [19.60], [19.70] time limits [19.50] transition to winding up [19.120] Voluntary assumption of risk overview [6.700] requirements of defence [6.700]

W War crimes Argor-Heraeus case, [12.400] corporate liability, [12.400] Warranties overview [4.560] Western Australia legal history [1.280] Winding up appointment of liquidator [19.130] members, by [19.140] receivership, during [19.290] breach of constitution, [10.260] directors’ duties [13.450] breakdown in mutual trust and confidence [14.790]

Index Winding up — cont compulsory (court-ordered) [19.135], [19.150] insolvency, in [19.160] contracts, effect on [19.220] creditors effect on [19.180] liquidators’ duty to [19.230] voluntary winding up [19.140] deadlock [14.800] deregistration of company [19.40] directors acting in own interests [14.750], [14.760] effect of winding up on company [19.190] creditors [19.180] customers [19.220] employees [19.210] members [19.200] employees effect on [19.210] entitlements [19.135] failure of substratum [14.820] fraud or misconduct, [14.810] grounds for [14.750]–[14.820], [19.170] breakdown of mutual trust and confidence, [14.790] deadlock, [14.800] Ebrahimi v Westbourne Galleries, [14.785] failure of substratum, [14.820] fraud, [14.810] “just and equitable”, [14.780] misconduct, [14.810] reluctance of court to grant, [14.770] incorporated association [9.540], [9.550] insolvency, in [19.160] lifting corporate veil case law, [9.950] liquidator’s powers and duties [19.230] members effect on [19.200] remedy [14.750]–[14.820] right to apply for order [14.340] voluntary winding up by [19.140] oppression remedy — see Oppression overview [19.135] partnership [19.160] relevant provisions [19.135] special resolution for [19.140], [19.170] statutory demand [19.160] transfer of shares [14.190] transition from administration to [19.120] voidable transactions — see Voidable transactions voluntary creditors, by [19.140] members, by [19.140] special resolution [11.250] Words and phrases acceptance [2.10], [2.10] applied industrially, [8.1750] assignee [2.720] assignment [2.720] assignor [2.720]

| W

auction [2.10] breach of contract [3.390] champerty [3.260] chose in action [2.720] condition [3.390], [3.600] condition precedent [3.10], [3.390] condition subsequent [3.10], [3.390] consideration [2.320] corporation [2.420] corresponding design, [8.1730] counter-offer [2.10] damages [3.600] deed [2.320] duress [3.10] electronic communications [2.10] employee [7.10] estoppel [2.320], [7.10] executed consideration [2.320] executory consideration [2.320] exemplary damages [3.600] fair dealing, [8.600], [8.620] fiduciary [7.10] forbearance [2.320] frustration [3.390] future consideration [2.320] goodwill [3.260] in pari dilecto [3.260] independent contractor [7.10] injunction [3.600] innominate term [3.390] intermediate term [3.390] invitation to treat [2.10] letter of comfort [2.310] limitation of actions [3.600] liquidated damages [3.600] minor [2.420] misrepresentation [3.10], [3.110] mitigation [3.600] nominal damages [3.600] novation [2.720] offer [2.10] offeree [2.10] offeror [2.10] ordinary damages [3.600] past consideration [2.320] penalty [3.600] postal acceptance rule [2.10] present consideration [2.320] prima facie [2.10] privity of contract [2.720] promisee [2.320] promisor [2.320] promissory estoppel [2.320] property [2.420] quantum meruit [3.600] quantum of damage [3.600] ratification [2.420], [7.10] rectification [3.10] reject [2.10] remoteness [3.600] repudiation [2.420] rescission [2.420] restitution [3.600] restraint of trade [3.260] 945

Business and Corporate Law Words and phrases — cont revocation [2.10] severance [3.260] simple contracts [2.320] specific performance [3.600] supervening event [3.390] tender [2.10] tort [2.420] trust [7.10] typosquatting [7.20] unconscionable [2.320], [3.10] undue influence [3.10], [3.190] unliquidated damages [3.600]

946

vendor [3.260] void [2.420], [3.260] void ab initio [2.420], [3.260] voidable [2.420], [3.260] warranty [3.390] Workers’ compensation overview [6.40] torts, distinction [6.10], [6.40] World Trade Organization TRIPS Agreement, [8.1560]